VALUE: After Hours (S07 E44): Narratives Follow Price — Not the Other Way Around

During their recent episode, Taylor, Carlisle, and Value Stock Geek discussed Narratives Follow Price — Not the Other Way Around. Here’s an excerpt from the episode:

Tobias: The narrative follows the price every single time.

Value Stock Geek: Pretty much. Yeah. And today, you’re probably seeing with AI. I don’t know if AI is necessarily the secular trend that everybody seems to be convinced it is. And then, I’m sure if AI spending goes down just a little bit, it’ll be, “What a waste of time. This was just nonsense.” And the truth is probably somewhere in the middle. [laughs]

Jake: Right. There’re quite a few companies that– I would imagine there’s some names falling into your quality and expensive for a long time, and now all of a sudden are starting to look a little bit more attractive. Is that accurate?

Value Stock Geek: Well, that’s the thing. So, every week I look at a company and I would say, “90% of the time, it’s too expensive.” But it’s all about just constructing this big universe of quality companies and then trying to identify them when they’re a little beaten up. At the end of the year, there were a lot of good defense names that were good. My screen picked up Huntington Ingalls, which builds the aircraft carriers and that kind of thing.

There was concern in Q4 that there were all the issues that were happening with the budget that these contracts wouldn’t be fulfilled and that all turned out to be nonsense. And now, the stock is up 70% just by reverting to the mean. There’s a lot of things you see like that happen.

It’s the same thing with tech. I looked at all the tech companies in the beginning of the Substack in 2021. At that point, I said, “These are all too expensive.” And then, lo and behold, a year later, Meta is at a 10 PE, Taiwan Semiconductors at a 10 PE, Google was like a 15 PE back then, which is cheap for Google. You’ll see a lot of that.

A lot of that stuff happens. People get convinced it’s a secular compounder. I’ll add it to the universe, because there is some truth that the business is good, and then you just wait a little bit. It usually doesn’t take that long. [chuckles] All of a sudden, this is cheap again. And then, it’s at a moment when everybody thinks that, “Oh, it used to be a compounder, but now it’s garbage.”

It’s usually not. Sometimes it is, but usually when you’re looking at a lot of these really high-quality companies with moats, usually, they just go through cycles. It baffles people’s minds when they do.

Jake: I’m just going to use Copart as an example, but historically a pretty amazing business, but was always very expensive. Now, let’s call it a 23 or something PE. Are they interesting at that level for you, or are you really waiting until it’s like they’re down in like a 10?

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