kumar,
The confusion is understandable. In the end, it also might simply be that my opinion leaves room for disagreement. (Nah. Couldn't be! :)
I am at a loss to understand how "todays valuation" for a Gorilla matters in a ltb&h scenario.
Given two Gorillas with comparable fundamentals, would you rather buy the stock of the one that in your opinion fails to fully reflect the opportunities of the company or the one that does fully reflect those opportunities? Regardless of how long you hold a stock, the chance is good that the returns will be better for the stock you feel is less fully valued at the time of purchase.
My understanding has been that CAP & GAP are the preferred ways to evaluate Gorillas,
The problem is that I've never seen a quantitative valuation of CAP or GAP and haven't been able to devise my own method for determining it. There's a guy at Fool HQ who, after having already worked on it, feels that it is indeed possible to arrive at one. He promises to test it and retest it before going public with it. As soon as he does go public, you can be sure I'll let everyone here know about it.
because "the market consistantly undervalues Gorillas", because "the market" doesnt comprehend CAP & GAP.
I've made the point many times that just because Geoff Moore believes the market has always undervalued Gorillas in the past doesn't mean it is etched in stone that they will always be undervalued in the future. I'm not sure I even agree with him that they've always been undervalued in the past.
Each of us has to decide for ourselves about that. Let's use Qualcomm as an example of the point I'm attempting to raise to a higher level of awareness among us. If you believe Qualcomm is undervalued today at roughly $100, it would be very easy to argue that its $200 price tag a few months ago was fair value, not an undervalued price . If Qualcomm is fairly valued today, it's a given that at twice the price it was overvalued. In fact, the only reasonable argument in my mind that Qualcomm was undervalued at $200 is that today's price at a PSR of 18 is a screaming buy at a fire sale.
That might be a reasonable assessment, but it's an assessment each of us needs to fully understand and make in our own mind based on something other than the fact that it is 50% lower than the stock's former high. Even if we do arrive at that conclusion, it's certainly impossible to say today's value isn't a far superior value to the value when the price was $200. That being the case, it gives us reason to wonder if there weren't other Gorillas available at a better value than when Qualcom was priced at $200. In that context, I believe it is reasonable that an investor looking to enhance the probabilities of enjoying the best long-term returns should have compared Qualcomm's price at $200 at that time with any other Gorilla's valuation before making a decision to invest in Qualcomm.
In the end, remember that even Geoff Moore apparently seems to be backing off his feeling that the market always undervalues Gorillas. Frank reported to us that Moore recently said that the market may be wrong but not stupid. If the market is indeed wrong, that certainly leaves room for the possibility that it can overvalue a Gorilla.
It's just my thinking on the subject. Be reminded of my bias -- that I'm a valuation junkie. :)
--Mike Buckley |
