Your mind has been conditioned to search for cheap stocks in
expensive, stocks stocks that are called undervalue.
And this word undervalued has been used for so long and
investing that is basically synonymous with investing.
The goal of investing is to Simply scan through companies
and figure out which ones are the most undervalued, which ones
are selling cheapest. This has been the often quoted
strategy of Warren Buffett. Buffett is quoted saying, price
is what you pay value is what you get and in terms of
valuation when we're looking at. Individual companies, there's no
easier way to assign whether or not a company is undervalued or
overvalued then by the PE Ratio the price of the company
compared to its forward earnings.
This is a price to earnings multiple of the company and too
many investors whether or not a company's overvalued or
undervalued relies heavily on this PE ratio the bright line,
typically being a 20 PE companies, like apple that are
above a 20 PE, well, they can be looked at as overvalued
companies like Intel with a lower than Any PE currently
sitting at 14? This company is undervalued a
company. Like, Microsoft, 28 PE
overvalued a company. Like Paramount, Global a 94 PE
undervalued. Now, this may seem like an over
simplification, but this is how a lot of value investors are
doing analysis today. And why wouldn't they buying
cheap companies companies with a low price to earnings?
Ratios is what responsible investors do?
It's what intelligent investors do?
It gives you a feeling of superiority you're buying
inexpensive? These value stocks you're not
like one of those hype investors riding into the high, multiple
companies, you're responsible investors, putting your money to
work at the best value possible. Well, that all sounds great, but
there's one big problem to this thought process and it's this
guy right here, his name is Terry Smith.
One of the things that some value fund managers say is the
way their their help to make returns for you as by buying
significantly cheaper stocks and waiting for that re-rating.
Is there a risk then with your strategy that you're paying over
the odds at these? So expensive, the strategy that
this interviewer just described is exactly what I'm outlining
here. Value investors looking to buy
cheap stocks and waiting for them to be re-rated at a higher
multiple. This is the traditional
definition of value investing buying cheap companies and
waiting for them to re-rate. And this is Terry Smith's
response to this. Yeah, you're right.
That's how some value for managers seek to do it.
I have to say, looking at the average results that you just re
not very many of them seem to manage to achieve our
performance with that. Now, that's a little bit of a
burn right there. Terry, you don't have to go that
hard on the entire industry. But what he says is true, the
so-called value investors in the investment industry.
In most cases do not generate Alpha, they don't beat the
market over any consistent basis.
They have high volatility and they charge expense ratios.
On top of that that don't justify their performance
overall value. Investing in the professional
industry has been an absolute joke.
Most investors have not performed better than the index.
And Terry Smith stands alone in this category, he is one of the
very few that has consistently outperform the index across
multiple benchmarks. Terry, Smith's Equity Fund
called Fun Smith has had Stellar performance even at its large
size of now. Twenty nine billion dollars
approximately and assets under management is continue to
outperform its Benchmark, indexes its outperform, the
equity markets, the UK bonds and of course cash and it's done it
by a huge amount. It's had 16 percent annualized
Earns since Inception compared to the equity Market, which is a
total stock market's 11.8 percent return, to give you an
idea of how much that means over this time.
Period fun Smith, has total returns.
Since Inception of four hundred and ninety.
One point nine percent, the equity markets, the comparable
Benchmark has returned. 269 point, seven percent.
The out performance has been nearly double over this time
period and then even more impressive with that
outperformance is he hasn't accomplished it by taking on
Excessive risk, concentrated positions and results that are
unlikely to repeat. He's done it by consistent
investing in high quality companies, he's had very low
variance month-to-month performance.
You can look at it and there's not many draw Downs in as fund.
He has a better Sorrentino rating than the overall indices.
Meaning that immeasurable risk. Terry Smith is outperforming,
while taking on less risk overall.
This performance has been accompanied by less draw Downs,
less volatility and less severe of bear markets.
Terry Smith isn't shy about What's led to this out
performance and what he believes will lead to continued out
performance in the fullness of time, his strategy is simple,
avoid bad companies and invest in.
Good companies one of the problems of owning the bag
companies in life is while you're waiting for.
Those companies are sort of steel companies in the chemical
companies in the airline's of the banks of this world to have
an event, which is what people are really waiting for a change
of management, a take over the business cycle to turn up.
They basically destroy value just the same as it would just
Value for you. Personally, if you took in money
at a cost of 10 percent and you invested at five bad companies
are companies that earn low Returns on their invested
Capital. Their companies that take money
in at 10% in the, invest it at 5%, that destroys shareholder
wealth and Terry doesn't invest in those companies.
No matter how seemingly cheaper inexpensive, they are the invest
in what he calls. Good companies companies we own
taking money out, cost of let's call it ten percent and that
makes 30%, you can rely on the fact that we may get the share
price right or wrong where we buy them but whilst Sitting
there in that portfolio, they consistently create value.
So that's what our screening process is about.
It's about looking for companies that right across the business
and economic cycle have fundamentals that actually
create value by making a high return on Capital in cash.
This is a dramatic difference than the traditional way of
looking at Value. Investing traditionally value
investing has looked something like this.
You screen for companies that are on the surface cheap, we can
take the example of Citigroup. This is a cheap stock,
fundamentally speaking. When you look at some of the
basic valuation metrics, We look at an eight forward, P/E ratio,
that's a very low P/E ratio, half of what the S&P 500 is The
Price to Book value is 0.5. So on paper, this company looks
very cheap, maybe we could invest in this company and wait
for it to be rated by investors back to, it's appropriate.
Fair value of a let's say 12 forward P/E ratio, or a One
Price to Book value. And as it gets re-rated, the
price goes up, we make money and then we can search for the next
cheap stock to Make more money on.
That is a traditional definition of value investing and that is
not what Carrie Smith does. Instead of investing in
companies that are cheap and may become Fair valued Terry Smith
invest in companies that create value, they generate value every
single year that they do business and whether or not
they're cheaper expensive. They have a high probability of
continuing to create a lot of value for shareholders have
fundamentals, that actually create value by making a high
return on Capital in cash companies that have fundamentals
in creating High Returns on invested.
Capital in cash. Now luckily for us we can take a
look at the specific Holdings that Terry Smith has in his
portfolio. Let's go ahead and look at the
very top one here, Microsoft with a 10 point 6, 1 percent
waiting this is by far the largest holding in his portfolio
and it's almost a 4% waiting greater than the second place
one. So he has a lot of money
invested in Microsoft, Microsoft trades that a 28 forward P/E
ratio. This looks like an expensive
company a28 pe1, lots of companies are selling for 50 18
and 17 and 18 40. He's Microsoft sitting here at a
28 yet this is the biggest holding and fun Smith's
portfolio. Most investors believe that
Microsoft's expensive, Carrie Smith does not the next
companies one that's less known called ID, e XX Laboratories.
It's a Healthcare company. This one trades at an
astounding, 46 Ford, P/E ratio. Now, most of us would assume
that this company is overpriced because of the very high
multiple of price to earnings, but Terry Smith and fun Smith
May disagree. The company is at a six point
eight waiting. In their portfolio.
The next one after that is Estee Lauder.
This is also at a very high waiting in their portfolio of
5.4%, Estee lauder's. A makeup company that owns a lot
of Premium makeup brands but the company currently trades at a 32
PE ratio. So far, his top waited companies
are all way more expensive on a price to earnings than the rest
of the market 2846. 32, these are high multiple companies, we
can continue on with this list, we have another health care
company s YK Okay, this one's finally a little bit more
reasonable. It's only out of 23 forward, P/E
ratio, not quite as expensive, as the rest of the companies in
his portfolio. After that, we have a real Value
stock here, Philip Morris. This one trades only at a 17
forward P/E ratio but then we get back to more expensive
companies. Right underneath.
Philip Morris is McCormick out of 5.3% waiting McCormick, is
that flavor company? It makes lots of spices and it
has flavor signs for different companies and this one is
another premium High, multiple valuation.
It trades at a Then forward. P/E ratio, we can continue on
looking at, basically all of his top Holdings that compiled his
entire portfolio. The next one, after that at a
four point nine seven waiting is into it into it trades at a 33
price to earnings multiple. This is another so-called
expensive company in Terry Smith's portfolio after that, we
have Pepsi, everyone knows this company.
It's at a four point four, nine percent waiting Pepsi trades at
a 26, four turnings. These are all overvalued, every
single one of them, how Can Terry Smith, outperform the
market by investing in a basket of seemingly overvalued
companies? And after Pepsi the same Trend
continues, all of these companies create a high
multiples relative to the rest of the market leading many
investors to believe that these companies are overvalued.
Now this is the part that's confusing looking over his
portfolio. It appears that every single
company is overvalued based on the price to earnings multiple,
but then we look again at his historical performance and since
2011, he's dramatically out performed, all the major
benchmarks. Nearly doubling the world market
index and even we slice up different timelines and zoom
into different periods. For instance, from 2017, to
current day, fund Smith has continued to outperform The
Benchmark index. It hasn't had any type of Arc
like, sell off any 70% drawdown. Even in the most recent draw
down there, still outperforming the broader market indices even
when companies outside of their portfolio are doing particularly
well, like oil companies, for example, And Smith is still
prevailing. If the purpose of a value
investor is to determine the value of a company.
This is a perplexing problem. If we can't use Simple metrics,
like the PE Ratio to accurately determine the value of a
company, then what metrics can we use?
When I started investing to begin with?
I had many of the same simple views at a lot of new investors.
Have the company has a low P/E ratio that company is cheap.
There is more value there. The company has a high P/E ratio
that company's expense If it's overvalued but Terry Smith and
other investors have called into question this way of doing
valuation, this simple metrics like this don't accurately lead
to the true value of a company and he offers a different method
in determining the real value of companies like Pepsi like Estee
Lauder or like Microsoft. So with how quote-unquote
expensive all these companies are that Terry Smith owns in his
portfolio. You can imagine how he's
constantly bombarded with concerns and questions about.
None of these companies investors are looking at these
companies and saying, Terry, these companies seem very
expensive, compared to the Alternatives in the rest of the
market. Aren't you concerned about
valuation? Well, yes, Terry Smith is don't
over Pi. Second leg of our strategy.
This is probably the most Vex part of our strategy over the
years. People always worried about
whether we are overpaying, we were about whether overpaying.
You see last year, we finished the year with a free cash flow
yield of to point subset. So take the free cash flow that
our companies have generated after paying for everything
except that. Then which is a distribution
from the cash flow that we own and you'll see that it was two
point seven percent when that is divided by their market value.
How does that compare with the index?
While you can see their 5.4% for the ftse?
The companies we own are about twice as highly rated at half
the yield of the ftse. There's something that Terry
Smith does interesting there. That I don't see a lot of
investors doing. You looks at the Historical free
cash flow, yield of his fund compared to the rest of the
market. And this is something that we
have in qualtrics. The free cash flow yield like
You described is basically the trailing 12-month yield of the
free cash flow of the company. So it gives you a multiple or a
reference of how much free cash flow.
Your company's generating based on its last 12 months.
Now, fun Smith's Equity Fund has a free cash flow yield of 2.7%
which compared to the ftse 100 on financials.
It's roughly half as much. Another way of stating that is
his companies are trading at roughly double the free cash
flow multiple as the rest of the market.
But the verbiage that Terry Smith This here, the actual
words he uses are not cheap inexpensive.
In this case uses highly rated and lowly rated.
Notice how he calls his fund more highly rated, how does that
compare with the index? While you can see their 5.4% for
the ftse? The companies we own are about
twice as highly rated at half the yield of the ftse.
He says they're about twice as highly rated as a words he uses
and this is almost interchangeable from cheap too
expensive. Highly rated meaning expensive,
lowly rated meaning cheap and he goes on to immediately.
He explained why he doesn't think it's a problem.
He doesn't really consider a concern that his company's have
twice the rating of the rest of the market.
I personally wouldn't worry about a lot because I think an
awful lot of the stuff in the ftse is very poor quality stuff.
That's not going to produce great long-term returns for you.
Terry Smith takes a long-term View and he sees that even
though these companies have a higher, current free, casual
yield in terms of their long-term future.
They're not going to generate as much cash because they're lower
Quality Companies. Now, he goes on to compare his
valuation of his fund. The S&P 500, which still a bit
more expensive than the S&P you can see their 3.6% now.
Yeah, we are more expensive. Probably about 25 percent more
than the S&P. Now in this case, Terry Smith
used the words expensive and cheap and this is the common
terms, these are the common verbiage that value investors.
Use low P/E, ratio companies are cheap and high P/E ratio
companies are expensive. But notice how when Carrie Smith
talks through this, he's very intentional about the words that
he uses and he tries to substitute cheap for lowly.
Rated and expensive for highly rated because that more
accurately describes his investing Theory and how he
views valuation, what you've got to ask yourself is yes, we all
more highly rated but does that that's not expensive.
If the quality of our companies is even more significantly
higher than the index than the the rating on the shares would
suggest and so he considers his company's more highly rated on
the surface. They look more expensive, but
when you look at their comparative qualities, he
believes, they're actually cheaper.
So even though they're Rated companies still an aggregate, he
thinks he's buying the best value, the cheapest companies in
the market, all these companies, 25% better than the index. 50%.
Yeah, when you look at the range of those figures whereabouts to
get you and there's a clue at the bottom of this table, you
can see the free cash flows on our companies, grew 20% last
year or as we call it in the analytical team, as a technical
term quite a lot. Terry Smith's companies are more
expensive on a free cash flow basis but the truth of the
matter is they grow free cash flow much, Faster than the
average of the index and they have less likelihood of being
disrupted and they have longer life lines than most companies.
So even though they're more highly rated on the surface,
they look more expensive in aggregate, they're cheaper,
that's basically telling you that.
Yeah, we all, we have got slightly more highly rated
companies but they're growing faster than the market and
they've got better operating ratios.
Because I think what we're trying to get away from him in
representing this to you, is the idea that lowly rated equals
cheap and highly rated. It was expensive.
It depends what you're getting. It's like anything else in life
that you buy. The thing, we're trying to get
away from is the idea that lowly rated equals cheap and highly
rated equals expensive. It's like everything else in
life. It depends on what you're
getting. One of the interesting things is
when you look at different things to buy in any aspect of
life, most people are very diligent and thoughtful and the
way that they do analysis on their purchase, you can take a
home. For example, when people are
buying a home Peter Lynch always noted that They asked all the
right questions, they do the right research when they're
buying a home. They look at the location of it.
They look at the price, which is the price per square foot or the
total price of the house compared to the lot size.
There's different metrics, you can look at for the price of a
home. They go through and look at the
style of the home, the fixtures, they look at the kitchen counter
and if it's Marble they look at the flooring.
They look at the foundation. They look at the amenities and
then they'll also do an analysis on the quality of the nearby
schools. The location of The proximity to
different things in the city, they look at the taxes and the
cost of living there, the size of the property, if it's part of
a homeowner's association. When people look at buying a
home in most cases, they do some thoughtful and diligent
research. They know that it's an important
purchase that they should put time and energy behind but when
people look at buying a stock and many cases it's the exact
opposite, they look at one metric like the PE Ratio and
immediately come to conclusions of whether or not that companies
cheaper expensive. This would be similar.
To buying a home and only looking at the price per square
feet. Whether it's $100 150 or 200
dollars, not concern yourself about the location, the home
exists in a high crime area or that it's across the street,
from a railroad, or the style, or the size of the house.
That's not really important. As long as the price is cheap,
none of this other stuff matters, it doesn't matter, the
quality of the schools, the taxes or cost of living.
If there's a homeowner's association or any of this other
qualitative stuff. The big thing that investors
Focus And when it comes to stocks is the price and what
Terry Smith is wanting people to do is to take a more holistic
approach to evaluation instead of just looking at the price,
consider the other attributes, the same way you would, if
you're shopping for a home. Now, I use the example of a home
but Carrie Smith uses, the example of a car.
It depends what you're getting is like anything else in life
that you buy Foods, don't cost the same as Ferraris, right?
And, therefore, the fact that one is priced lower than the
other doesn't in itself. Tell you anything about the bar?
Sure, that you're getting now, if for a supposed to have
in-depth research that considers more than just the price, then
what other type of things are we supposed to look at for a home,
we know intuitively what to look at.
We know to look at the schools, we know to look at the home
style and location. We know to look at the taxes or
the crime rates of the place we're living in.
We know all of this stuff intuitively to keep in mind, but
with stocks we don't know. Intuitively what to look at is a
little bit more confusing in some cases.
Terry Smith's approach resembles that of finding Compounders and
I talked about Compounders As a term, I used to describe
companies that have lots of characteristics that most
companies in the market do not have.
It's not just stocks where the price goes up.
That's not what defines a compounder.
The best definition I've ever found of a compounder is in this
Morgan Stanley study from 2013. They say we defined Compounders
as companies with high quality franchise businesses, ideally
with recurring revenues built-in dominant and durable intangible
assets which possess pricing power low capital Well
intensity. When evaluating these companies
we focus on franchise quality and durability of financial
strength industry position and management quality.
The key financial characteristic of Compounders is that they
enjoy sustainable High Returns on invested Capital roic.
They say that it's generated by a combination of recurring
revenues recurring, meaning that they're getting money,
continually, high gross margins and low Capital, intensity.
This combination helps support strong, free cash flow
generation. Surely that must either be
reinvested or distributed to shareholders.
Compounders also tend to be relatively robust and economic
downturns. With steady operational, cash
flow and no excess. Leverage, profits are typically
less sensitive to economic conditions given the repeat
purchases at high-growth margins.
This combined, with the low cyclicality of top-line demand,
because these companies typically sell non-discretionary
items. Help insulate, Compounders from
the - cyclical impacts of operating cash flow.
These characteristics This coupled with modest top-line
growth have helped ensure that intrinsic value of Compounders
continues to grow over time. Now, this definition of
Compounders, I think, is obviously thorough, but it's
also difficult to wrap our heads around.
They have a lot of characteristics.
And how do you boil this down to a realistically investable
thesis? Well, Terry Smith has actually
done this. He's taken the definition of a
compounder. The one that we just read and he
boils it down to five different ratios, five.
Different things that he tracks for his portfolio.
The try to determine whether or not the companies.
He owns our long-term Compounders and this is an
objective scientific way of looking at solving this problem.
The first thing that he highlights is our oce.
The return on Capital employed is very similar to Returns on
invested Capital. If you look at it the return on
Capital at companies last year, Roc and the table return on
Capital employed was 28%, a recovery from the prior year.
When there was a bit of a downturn caused by the pandemic,
This is highly satisfactory insofar as It's back to where it
has been in the long term and you'll see that it's
significantly ahead of where the index are.
Whether it's the SP or the ftse smile has companies are more
highly rated. They have much better Returns on
Capital employed, then the rest of the index and this makes it.
So, they create more long-term wealth than the rest of the
index to put it in English for every pound on dollar of
capital, we own in these companies.
In our portfolio, we're getting 28 pencil sense of profit
return. Whereas, if you're in the index,
you're getting about 15 pounds. Our companies have been
delivering, Twice as much return.
And I think that's the single most important metric to look
at. When you look at our company's
performing when I've gone through and done analysis, on
the companies that I'm investing in one of the metrics that I
started to look at is this return on Capital employed and
the companies that I've targeted have a particularly High return
on Capital employed. And I've come to believe that
this is such an important metric that I'm leaving out of my
analysis that I'm actually going to be adding this metric into
qual trim. I'm going to make it really easy
to look at the long-term historical return on Capital.
Employed for every single company my portfolio because
without this you don't know how effectively your company's
reinvesting, its profits. So in comparison to doing home
shopping the return on Capital employed is like, looking at the
location. If you buy a stock without
looking at how effectively the company can reinvest its
capital, it's kind of, like, buying a home without looking at
what location it is. You don't even know whether or
not you're buying a home in a high crime area or a low-crime
area after that. The next metric that he looks at
is gross margin. This is one that I think most
people are familiar with gross margin.
These are the difference between revenues and costs of goods.
Sold companies take in stuff, they take in ingredients or
components or services and do something with them and turn
them into products and services that they sell.
This is the mark up the difference between the two, our
companies are at 64%, which you'll see is pretty rock-solid
down the years. Basically, in English, they're
making stuff for 36 and selling it for 100.
If you look over at the index you'll see around 45% companies
in the index are making things for 55 and the seller.
Get 400. The gross margins.
Like you described are simply how much the company can make
something for and then how much they can sell it for.
That's their gross margin. And the companies that Terry
owns have a much higher average, gross margin than the rest of
the index. If you're looking at a stock and
you don't consider the gross margins or operating margins of
the business, it's like buying a home, but not even doing your
due diligence, not even walking through the place and maybe the
home has fractures, and it has breaks in the foundation that
cheap home. Might end up being a lot more
expensive than it originally looked.
And Terry Smith. Also mentions that gross margins
are possibly the best hedge against inflation.
That is really what controls the pricing power of the company.
Now after looking at the Returns on Capital employed and the
margins of the business, the next big metric that Terry Smith
looks over. His portfolio is called Cash
conversion. It's amount of net profits.
The company generates compared to the amount of free cash flow.
We can take the example of Domino's Pizza.
This is a company that I have in my portfolio.
If we look at the 2021 net income of the company.
Was 491 million dollars. So 491 net income.
And 2021 if we compare this to the cash flow, they made 504
million dollars in free cash flow.
So Domino's actually made more money and free cash flow than a
net income. That means they had above 100
percent cash flow conversion. We can take a counter example
here, Netflix, this is a company that has very low cash flow
conversion. In fact it's extremely low.
If we compare their net income in 2021 a 5.1 billion dollars
with their freak, Ashlyn 2021, their free cash flow in 2021 was
- 131 million dollars. So, net income of five billion
free, cash flow of - 131 million right now.
Netflix has a negative cash flow conversion and that's telling
about the company Terry Smith likes to focus on companies that
very high conversion rates of cash flow.
But also companies have consistent conversion rates of
cash flow in this period of time.
In a rare instance. The actual indices are
outperforming, Terry Smith's cash.
A slow conversion but explains why this is the case and it's
not likely to last cash conversion.
Our company's converge at 95 percent of their profits into
cash last year. The index had a particularly
good performance. You'll see out there producing
somewhere in the region of 100 and 108 to 124 percent of
profits in cash. This is a, is a bit of an
unusual feature. And the index is performing,
particularly well at the moment for a couple of rather strange
reasons bear in mind, this is a ratio and if you make your
profits, go down, more than your cash.
Throw your cash conversion, looks good.
It's not a very good place to be but nonetheless that's how the
ratio comes out. And the reason that's happening
is companies in the index by and large had bigger Falls in
profitability than our company's did.
And at the same time because of supply chain difficulties, they
had an awful lot of stock out so they're working capital went
down invested in the business. So they didn't make as much
profit but they converted more of the profit Into Cash.
That's his explanation of why the index has a higher cash
conversion than his portfolio. Now the final metric that Terry
Smith looks at here is called interest cover.
And this is a way of looking at the actual leverage of a company
when you look at their profitability, compared with
their obligations and interest payments and lost the interest
cover. So is all this wonderful
operating performance that we're getting from our companies being
delivered with a lot of borrowed money and balance sheet
trickery. No our company's last year 23
times interest cover. So their profits comparable what
they're paying out in interest and Lease rentals was 23 times.
I mean there's he's a very strong balance sheet business is
basically you can see they Leavitt last year 16 times a
year before the index not in bad position.
If you look at eight to nine times, interest cover is pretty
good but clearly these are very conservatively finance
companies. They are not producing this
performance out of financial engineering, that's simple
enough. His companies in terms of the
prophets they generate compared to their interest payments is a
much higher multiple, which is a good thing compared to the rest
of the index. So you can see in terms are
doing valuation and Analysis, that Terry Smith looks at more
than just the price of the company.
If he's buying a home, he's looking at the Returns on
Capital. Capital employed.
He's looking at the location of the property, whether it's in a
good location, he looks at the cash conversion.
He's looking at the neighborhood and seeing if it's low crime
area, it looks at the interest coverage.
He makes sure the home has nice stainless steel appliances
marble countertops and nice. Flooring Carrie Smith does
holistic, research on a company. That's why he comes to the
conclusion that many of the companies that appear to be more
expensive in his portfolio are actually in aggregate, All
Things Considered cheaper. Now, I hope you're enjoying the
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Trade now, I know anytime I point out that there's other
important fundamentals to take into consideration in terms of
valuation than just the PE Ratio.
It also brings up the problem that many cases, people swing,
this pendulum way too far to the other side and use these type of
videos in this type of content, to justify buying seemingly any
company at any price. And in most cases, lots of
companies that are higher prices are not worth the extra price.
It takes a lot of convincing to If I paying a 28 forward P/E
ratio, it takes even more to justify paying a 30-plus or a
40-plus to justify paying a 30 plus PE ratio.
A company would have to be completely phenomenal.
With all of these other metrics have extremely high Returns on
Capital. Employed have 70% plus gross
margins have high operating profit margin, good cash
conversion, incredible, interest coverage and beyond that have
good brand, value franchise quality and long term durability
with the Any it has to have these metrics to justify having
a high P/E ratio. So I'm not suggesting to ignore
the PE Ratio to not consider it or did just buy any company, at
any valuation. That's not the purpose of this
video, but it's when you do analysis, you're buying an
actual company, there's lots of operating metrics to.
Look at that lead different companies to have more long-term
value creation than other companies.
And lots of those metrics are very simple and easy to look at
but they're routinely ignored in favor of Valuation metrics.
And remember that, there's lots of ways to invest in the market,
there's lots of ways of earning money.
Many people are good at investing in low P/E companies,
buying all the financials and cyclicals, and oil companies and
timing the ups and downs of these.
Highly volatile companies, at just the right times, they can
make money doing that, but that's not the approach.
I'm taking. I will always consider the price
to earnings ratio, the free cash flow yield and other valuation
metrics and every single company that I own.
But I'm also going to be considering the franchise
durability. The Returns on Capital employed,
the margins of the company, the cash flow conversion, and The
Leverage of the company. I'll have more than just one
consideration when making a purchase.
So I hope you enjoyed this video.
It's a little bit different than usual but I thought this is an
important subject to talk about. Having said that I'll have more
content out in the future will be going over the news.
Well, you going over earnings report and other important
subjects. So make sure you subscribe to
the channel and I'll see you in the next one.