I’ve seen it before in relation to, I think, it was Walmart. But there’s a chart that he includes from Jeremy Siegel that shows how vastly undervalued they were by 1982, which is what then delivered the incredible run through to 2000 and probably where they got overvalued near the end. So, for a decade, if inflation spikes all of these long duration type stocks that have got the high PEs probably get smashed up. He’s got some other conclusions about probably what happens in the interim. He says that fair value for Coke in 1972 was 82 PE, it would have delivered 9% return. And then, let’s look at the PE that would have delivered a 9% return. But on this analysis where you say the market does X, 9%. Jake: There were all kinds of capital allocation shenanigans that happened.īill: So, I don’t know what it’s looked through PE wise. Flow free bridges extrememlvl 32 movie#Didn’t they also have that movie studio at the time? He looks like he’s–īill: No, I don’t know. Somebody in the audience might know that. Tobias: My recollection is it was 22 times. I think it might have sold off some when he backed the truck up, but I don’t remember. Jake: Late 80s is when he bought most of it, right? It was after that New Coke snafu. And I think Buffett paid 22 times for Coke? You guys remember that, off the top of your head? So, Coke in 1972 had a PE of 46 and it still went on to deliver 16.2% compound through that period. And then, he gives the example of Coke too. And at that 40, it would have delivered only 9% a year. And fair value for Costco would have been a PE of 40. Costco from 2002 to 2015 had a PE of 15 and it delivered 15% to 20% returns through that whole period. And so, he says that PE 25 was a fair value PE, because it delivered a market return.Īnd then, he looks at two specific examples. If it had been a PE of 35, that would have been 5% per year. And if it had been a PE of 16, same stock, you would have had a 14.7% compound return in that period, which would have outperformed the market and so, it would have indicated that it was too cheap. And so, he concludes that at 25 times, that stock was fairly valued, because it then went on to deliver a market return. Jake: Buffett- “Well, you already knew have the answer, but you pretend like you’re doing math in your head.” Tobias: Did you just do it off the top of your head? He assumes that you get this multiple compression from 25 to 20 and you end up with a $51.80 stock when you started with a $25 stock. But these are pretty good companies that collectively had done something like that. And year 10, assuming that earnings grow 10% per annum, 10% per year, that’s a pretty high rate of growth. So, he says, year one, $1 of earnings with a PE of 25, that’s $25 stock. Earnings growth, your beginning PE and your ending PE, and any dividend that you collect along the way. Flow free bridges extrememlvl 32 drivers#Just by virtue of the fact that you require some free cash flow, you’ve eliminated a lot of stocks that you probably don’t want to hold.īut then, he’s got this interesting analysis where he says there are three drivers and returns. Flow free bridges extrememlvl 32 for free#If you could constrain the universe to things that have free cash flow and you’re doing it for free cash flow multiple, then again, you’ve constrained that universe even more. Just wanted to point out that there are other levels to that game as well, as far as some stuff that got expensive. Tobias: That’s one of the things that if you constrain the universe and things that have got a bottom line, then you. Tobias: Yeah, and it’s got a bottom line. Jake: Wait, that’s a PEE that they’re measuring, right?īill: That’s not 50 times sales or some of these other things. And so, he says it’s not fair to characterize it as a bubble that burst, because from that peak, they went on to generate 12% compound. So, they were more than twice what the market was. So, Nifty Fifty 1970s, the names that he pulled up, Coke, P&G, Johnson & Johnson, Disney, AmEx, Pfizer, as a cohort, they had a PE of 42 average versus 19 for the S&P 500. Tobias: Do you want to do this one now, because they make comments about the PE. In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Comparing the PE Ratios Of The Nifty Fifty Companies With Today.
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