Wall Street glorifies companies that beat quarterly estimates by arguing that the long term comprises a lot of short terms. But beating earnings estimates for a few consecutive quarters doesn’t necessarily lead to long-term greatness. It assumes that significant changes to the business are visible in the reported numbers.
This is likely what General Electric
Conversely, consider Apple
Quarterly misses and beats show only what is seen, but true investors are able to see the unseen.
With the luxury of hindsight, I picked two examples, GE and Apple, that seem to prove that earnings misses are great and beats are bad — but they are neither. They are part of the vocabulary of the semi-staged reality game show on business TV — which I choose not to participate in. Facebook
This doesn’t mean that an investor should completely ignore what happens in the short run, but quarterly earnings should be always looked in the right context — the context of the long run.
Long-term thinking should be deeply embedded in your stock analysis. A discounted cash flow (DCF) analysis model forces you to value a company the way you’d value a private business, bringing cash flows that lie decades in the future into the present.
But DCF analysis, though grounding, is a crude model that is most useful at the extremes of a company’s valuation, when a company is wildly overvalued or undervalued. This is why it makes sense to estimate a company’s value based on earnings multiples. In my process, I look at a company’s expected earnings three- to five years out and then discount it back (convert to today’s dollars). This is the key: By looking at a company’s earnings this far out, you muffle the noise of quarterly earnings — the “what have you done for me lately?” hysteria — and focus on the future.
So, how does one invest in this overvalued market? Our strategy is spelled out in this fairly in-depth article.
Vitaliy Katsenelson is the CEO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)
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Vitaliy Katsenelson
Vitaliy is Chief Investment Officer at Investment Management Associates, Inc (IMA), a value investment firm based in Denver, Colorado. Vitaliy joined IMA in 1997. He received both his bachelor of science and master of science degrees in finance from the University of Colorado at Denver.
He is the author of two books, and his articles have appeared in Barron’s, The Financial Times, and Business Week, among others. Vitaliy has been a guest on CNBC, Fox Business, BNN and Yahoo! Finance.
He also writes a monthly column for Institutional Investor magazine and speaks to investor organizations in the U.S. and abroad. Vitaliy has close to 20 years of investment experience and has taught a graduate investment class at the University of Colorado at Denver.
Vitaliy is a CFA Charter Holder and has served on the board of the CFA Society of Colorado. Forbes Magazine called him “The new Benjamin Graham“. You can read more of his writing at Contrarian Edge.
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