Invest-ability daily 25/10/21: Higher and Higher

Shares in good companies are getting very expensive

I’ve been having a lot of fun messing around with SharePad’s filtering tools this weekend – I can’t let Phil have all of the stock screening joy to himself after all. It’s a very powerful tool that lets you cut the data in a seemingly infinite number of ways, and a lot more intuitive than the expensive data tools I’ve used over the years. All in all, it should make the business of whittling my extensive watchlist down into something more investable much easier.

What is troubling me, however, is that many of the companies I want to buy don’t seem particularly cheap at the moment. I don’t mind coughing up for quality, but my natural inclination is towards bargain hunting and there seem fewer and fewer of those on the UK market at the moment. According to a couple of basic price filters, 14 companies hit 52-week highs today, with 76 companies making new one-year highs in the last 30 days; conversely, only one – CMC Markets – stands at a one-year low, and just 25 companies bottomed in the last 25 days.

What this tells me is that momentum is still a powerful force – “buy high and sell higher” as I saw it described recently. And it’s happening everywhere – 79 companies in the S&P 500 hit a one-year high on Friday, 153 have hit their one year high at some point in the last month, and only 28 stocks have hit a one year low in the period. Indeed, the widely used French Momentum Factor has beaten other benchmarks in every decade since the 1960s, and so far by a comfortable margin in the 2020s – by over 10 percentage points in fact.   

Of course, price alone doesn’t signify value, but we are seeing a major rerating effect at work. Take Diageo, for example, one of the twelve making a new 52-week high today and which sits at the top of my watchlist – since 2008 its trailing PE has doubled from 15 to over 30 and its PEG – the price relative to the rate of earnings growth – has also risen quickly. In short, the price is rising at much faster rate than earnings are growing. And it’s the same story at lots of good business, like Halma for example, which Phil and I discussed on this week’s podcast along with lots of other companies in the UK’s excellent electrical engineering sector.

Another company hitting a new 1-year high today is the Scottish Mortgage Investment Trust. I have always really liked this trust – in fact, it’s one of two vehicles that I parked my kids’ pension in a few years ago when I set them up (the other being Fundsmith). I figured that it was a great foundation for a long-term holding – 50 years of compounded growth across sectors exposed to the biggest technological trends should make for a very comfortable retirement for them, and they’ve got plenty of time not to worry about ups and downs along the way.

But if I wanted to buy it today, I’m really having to stump up for its quality – the premium to NAV stands at well over 2%, a big jump from the discount when I last bought it and an indication of the market’s ebullient mood, especially when it comes to sectors like technology. That may still last for some time, and expensive companies with momentum may indeed move higher still, in which case sitting on the side-lines would be a mistake.

But it may not – momentum in aggregate may be a powerful market force, but feels detached from the more fundamental approach Phil and I like to take, and does have a habit of running out of steam, often in quite unpredictable ways. And rushing into investment decisions never seems like a good idea, even if everyone else seems to be making lots of money – FOMO (fear of missing out) is a very dangerous behavioural bias that I do have a handle on. In fact, I’m happy to play with the data for a bit longer – there may be better opportunities tomorrow.

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