<THE BORING PORTFOLIO>
The Business/Stock Disconnect
Gateway Scores
by Alex Schay (TMF Nexus6)
ALEXANDRIA, VA (April 26, 1999) -- Dale covered a lot of ground on Friday, as two of the companies in the "Folio" reported their numbers for the quarter. Both American Power Conversion (Nasdaq: APCC) and Gateway (NYSE: GTW) continued to gain some ground today. The continued resilience of Dell and Gateway in the PC industry, in terms of their gains from operating efficiencies and snatching share from rivals, is a marvel. Their performance together, and Gateway's performance in particular, reminds me that it might be a good idea to reassert one fundamental tenet of the Bore philosophy that's worth a closer look.
When we outlined the tenets back in October, we quoted William Miller of Legg Mason Value Trust: "There is no theoretical difference between value and growth; the value of any investment is the present value of the future free cash flows of the business." We stated that we fundamentally align our valuation reasoning with this statement. Miller goes on to say that the "terms are mainly used by consultants to allow them to carve the world of money managers up for clients. They represent characteristics of stocks, not of businesses."
It is this last element that I would like to mention a few words about. Without exhuming Saussure, or getting into any complex semiology, stock tickers can be looked upon as simple signs. That is, they are signifiers which carry meaning, and the signified element that is referred to are the companies themselves (together they are a sign). In this particular system it's very easy to conflate elements surrounding the mechanics of buying stocks, with the performance of the actual businesses that they refer to.
The terms of the nonsensical growth/value debate fall squarely within a framework dominated by stock-centric timing concerns -- like the typical earnings expectation life cycle:
Growth FALLING Torpedoed I I Negative Surprise Models I V Estimate Revisions I I Dogs I I Neglect I LOW Contrarians I I Positive Surprise V I Positive Surprise Models I RISING Estimate Revision I V EPS Momentum I HIGH "Growth" I I VWithin this framework, unskilled "value" investors are said to purchase companies too early -- that is, somewhere near the period of estimate revisions to the period of neglect. In this case, value investors needlessly expose themselves to stocks that might languish during extended periods of underperformance before eventually picking up, or perhaps, they might never even pick up at all. Meanwhile, good growth investors purchase companies during the period between positive surprises and EPS momentum, catching their companies on the way up.
We ultimately reject this entire framework as bunk, for it is predicated on two rather specious assumptions: (1) that meeting EPS estimates is the sole determinant of market value; and (2) that a company's cash flows are definable in persistent and repeatable trends that move through boom and bust cycles. For a more complete rundown of the Bore philosophy check the archives. Until then, see you on the boards.
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