Your Fundamentals Are Backwards!
Do you ever wonder why you read books, you study, you read reports, you think you do everything rightr and yet you still lose money? Here's why your fundamentals are wrong.
The best stocks in the best industries will overbuild, overpay for assets to expand, will increase debt as the outlook has never been better and the earnings forecasts will be much higher than they should be based on the fact that every time they made aggressive forecasts they beat them before. And then everyone wants a piece of the industry, no price seems too expensive as the company has accelerating growth and perhaps has even grown into it's earnings to reasonable PEs in some cases and the play seems super obvious. But everyone owns the stock and so there isn't enough buying pressure to keep prices this high. Even on good news when people decide the future is bright some will use that event to take profit, and there isn't enough buyers below. Others rush for the exit. THis is only in regards to price, what about fundamentals?
The increased competition means shrinking margins, shrinking earnings despite increased forecast, assets were overpaid for leading to poor returns, the so called "healthy balance sheets" were based on overpricing assets that will soon lose value, and the dumb money wanting in the industry late will flea and those assets wont have a buyer. Meanwhile the excess capacity they built will have to be sold or else to put them to work prices will have to be lowered and margins will contract and that means many missed forecasts and eventually downward revisions in the future and eventually even losing money or at least maximum fear of loss.
No fundamental is safe.
Price to book? What happens when the book value is based on assets that are going to decline by 50-90%? Price to earnings? The fastest growing best companies to invest in will trade at PEs too high for you to access and the worst will be "bargains"... forever. Price to cash? No one likes a company that has a lot of cash when times are good, and when times are bad the company with a lot of cash relative to its price is probably still overleveraged, in debt and about to lose money and continually will require that cash just to pay the bankers. "negative enterprize value"? This refers to when you could theoretically buy an entire company (like you'll ever have that much money, LOL! NO!) and use the companies cash and cash equivelents to pay off all the debts and still have enough money left over to get your money back. SO if you buy a company for $100million, with $250 million in cash and $150M in debt you take the cash, pay off the debt and you have $100M in cash. You removed risk from the equation in theory because you own the remainder of the business for free and if it was really your company you can put that $100M in cash remaining to work on another company.
But negative enterprize companies are usually terrible money drains that continue to do business losing money and it won't be that long before the advantage is gone. Plus, even though on paper you could buy out the company, if you had any real money you'd know that your buy order would push the price up and it wouldn't trade below these levels for long on top of it isn't as easy to just liquidate and shut down operations, particularly if there are legal challenges down the pipeline that may lose more money than it has, and assets in receivership if one of the shareholders who won't sell was a part of a ponzi scheme or tax fraud. The government may seize assets including cash and prevent you from accessing it until the manner is settled.
What about P/B? P/S? none of these hold up as price to book should be high when a company has strong and growing earnings and book values. Book value only tells you what a company is worth if you sell everything in the company at the price its listed as. Even "liquidation value" which assumes some discount again assumes you can get at those assets and you may not. Book value tells you what a company is worth "dead" rather than alive. Not good.
In Total, fundamentals mean nothing out of context from the cycles of the industries, and so go ahead and invest using fundamentals while I take your money!
Yay for you!
--option asshole
The best stocks in the best industries will overbuild, overpay for assets to expand, will increase debt as the outlook has never been better and the earnings forecasts will be much higher than they should be based on the fact that every time they made aggressive forecasts they beat them before. And then everyone wants a piece of the industry, no price seems too expensive as the company has accelerating growth and perhaps has even grown into it's earnings to reasonable PEs in some cases and the play seems super obvious. But everyone owns the stock and so there isn't enough buying pressure to keep prices this high. Even on good news when people decide the future is bright some will use that event to take profit, and there isn't enough buyers below. Others rush for the exit. THis is only in regards to price, what about fundamentals?
The increased competition means shrinking margins, shrinking earnings despite increased forecast, assets were overpaid for leading to poor returns, the so called "healthy balance sheets" were based on overpricing assets that will soon lose value, and the dumb money wanting in the industry late will flea and those assets wont have a buyer. Meanwhile the excess capacity they built will have to be sold or else to put them to work prices will have to be lowered and margins will contract and that means many missed forecasts and eventually downward revisions in the future and eventually even losing money or at least maximum fear of loss.
No fundamental is safe.
Price to book? What happens when the book value is based on assets that are going to decline by 50-90%? Price to earnings? The fastest growing best companies to invest in will trade at PEs too high for you to access and the worst will be "bargains"... forever. Price to cash? No one likes a company that has a lot of cash when times are good, and when times are bad the company with a lot of cash relative to its price is probably still overleveraged, in debt and about to lose money and continually will require that cash just to pay the bankers. "negative enterprize value"? This refers to when you could theoretically buy an entire company (like you'll ever have that much money, LOL! NO!) and use the companies cash and cash equivelents to pay off all the debts and still have enough money left over to get your money back. SO if you buy a company for $100million, with $250 million in cash and $150M in debt you take the cash, pay off the debt and you have $100M in cash. You removed risk from the equation in theory because you own the remainder of the business for free and if it was really your company you can put that $100M in cash remaining to work on another company.
But negative enterprize companies are usually terrible money drains that continue to do business losing money and it won't be that long before the advantage is gone. Plus, even though on paper you could buy out the company, if you had any real money you'd know that your buy order would push the price up and it wouldn't trade below these levels for long on top of it isn't as easy to just liquidate and shut down operations, particularly if there are legal challenges down the pipeline that may lose more money than it has, and assets in receivership if one of the shareholders who won't sell was a part of a ponzi scheme or tax fraud. The government may seize assets including cash and prevent you from accessing it until the manner is settled.
What about P/B? P/S? none of these hold up as price to book should be high when a company has strong and growing earnings and book values. Book value only tells you what a company is worth if you sell everything in the company at the price its listed as. Even "liquidation value" which assumes some discount again assumes you can get at those assets and you may not. Book value tells you what a company is worth "dead" rather than alive. Not good.
In Total, fundamentals mean nothing out of context from the cycles of the industries, and so go ahead and invest using fundamentals while I take your money!
Yay for you!
--option asshole
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