Investors have rushed to a narrow universe of companies, driving valuations higher and placing the stocks in danger if growth disappoints
Transcript
| Chris Davis: | There's always parts of the market that are going to be extremely overvalued or priced based on extreme optimism. What we would say is that if you're priced based on extreme optimism, everything has to go right for you to be justified in that high PE. As interest rates rose, what you saw very sensibly was the market saying, okay, forget this crazy speculation. We're out of that. We're out of the specs, we're out of the non-earnings. Now where the highest relative valuation sits are in the components where people feel extremely safe. Think consumer utilities, some things like that. We think those are very overvalued because the underlying growth is so low and in many cases the businesses have deteriorated more than the market realizes. Look at the balance sheets, look at the growth rate, look at the acquisitions that have been done to sustain even an anemic growth rate. Think of what happened at Anheuser-Busch as really a powerful marker of how quickly and how dangerous the assumption that consumer brands are safe may be in a world where consumers are fast changing habits. Then on the other hand, people have felt what I'll call safe being very optimistic about fewer and fewer and fewer companies in terms of high growth. You've gone from the speculative nonsense to what we would classify as a portfolio of excellent companies, but where enormously high growth is getting baked in, think of Nvidia and so on. We just had a long research meeting talking about how a relatively small group of customers has a large interest in trying to bypass Nvidia, what that could look like. We just think that you don't get a margin of safety. A lot has to go right to get it. That doesn't mean that they're certainly overvalued, but it means you've given up on the margin of safety, you've given up on the free option of things being better than expected. |
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