Misleading article. My reasons:
1. You can have a DCF model with 5,10, 20 year high growth period. DCF makes the assumptions explicit! PE does not.
1/n
1. You can have a DCF model with 5,10, 20 year high growth period. DCF makes the assumptions explicit! PE does not.
1/n
If a FM says I am buying the stock because I am betting the company will grow CFs at 25% CAGR for 20 years (when a minuscule proportion of company, if any, have managed to do that) it sounds like a high hurdle.
2/n
2/n
But “a quality franchise with longetivity of growth should trade at high PE” sounds almost wise. Even when this PE ratio has been calculated without any basis. (Historical comparisons are not acceptable).
3/n
3/n
You can’t say nobody would have predicted company X will grow at 20% some 20 years ago and hence it is also a buy today. What has the basket of all such companies done when they were trading at those valuations at that time. Selection bias.
4/n
4/n
20 years ago many of these companies were trading at lower PE/Sales. Margin and ROIC expansion were a big driver of returns. They can’t keep expanding for ever.
5/n
5/n
Lastly at what PE such a franchise become expensive: 100, 200 a 1000? If there is such a number then what is your process of calculating it? If you can’t spell it out you are just a speculator basking in the glory of recency bias.
n/n
n/n
