On this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by Jason Moser as he breaks down what he looks for in a "never-sell" stock. The final attribute on the agenda: Valuation. And there are a whole lot of different ways to gauge whether a company's stock price makes it a good deal for you.A full transcript follows the video.
This video was recorded on August 2, 2016.
Alison Southwick: And the final thing we're going to talk about is valuation.
Jason Moser: Sure. Everybody now go to sleep. [Snores]
Southwick: For just a little bit. I'm just going to close my eyes. I'm not actually going to be asleep. I'm still listening.
Moser: I think a lot of people do, too, when it comes to valuation because it seems like it's the boring part of investing. It requires some math. Maybe it's not the most fun in the world. I get a kick out of it.
There are two schools of thought, I guess. There's some investors who don't really focus too much on valuation, and then there are other investors that focus, maybe, too much on it. I like to find the middle here. I think price always matters, ultimately.
Southwick: I'm sorry. I should take a step back. Valuation, of course, being the value that the market believes the company is worth as opposed to how much the company, itself, is worth on the balance sheet.
Moser: Right. We look at the stock, today, and it's selling for however many dollars, and there's a price/earnings ratio that's tacked on there that tells us basically a multiple. It gives us an idea of how expensive or how cheap the stock is today. There are many ways to assess valuation. It's not just a P/E ratio. You can build out discounted cash flow models. You can build out simple earnings models. You can look at multiples. Compare them over time.
Again, there are quantifiable aspects when it comes to valuation that are very easy to figure out when we look at a business like Under Armour or Starbucks, but there are qualitative factors that come into a valuation that are less easy to put a number around. We talk about the quality of the business. The quality of leadership. The quality of the competitive position that it has.
I think Amazon (NASDAQ:AMZN) is a great example of one that historically has been super polarizing. Everybody who's on the bearish side is bearish, basically, because they think the stock is too expensive. They've been saying that every step of the way, and they've been proven wrong, obviously, every step of the way. There are a lot of qualitative factors that go into that business that the numbers don't quite bear out. I think they've built out a tremendous network, there.
Southwick: How do you put a price on a CEO like Bezos? How do you put a value on his strong leadership and his vision?
Moser: That's a really great point. He has this mentality when he wakes up, every day, where he feels threatened. He feels threatened by his competition. He's threatened by disruption every single day, and that's the way that he approaches that business. That's why he's always relentlessly trying something new and building out that business.
You can now see between the retail operations that they've developed — between the Amazon Web Services operations that they've developed — if we just eliminate the math, here, and just say that if you closed Amazon's doors tomorrow, the world would basically stop turning. Netflix would stop working. I think that really gives people a better idea of how important Amazon is today.
Southwick: Why would Netflix stop working?
Moser: Because Netflix runs off of Amazon Web Services.
Southwick: Oh, really?
Robert Brokamp: And the world runs on Netflix, therefore...
Moser: Right. And the world runs on Netflix...
Brokamp: ...if Amazon went away...
Moser: ...everybody would have a conniption fit at once.
Southwick: Oh, man.
Moser: But I think that's just one example of what they've done. They've really helped define this new e-commerce age, and there's still plenty of opportunity out there. And he basically sees it as kind of the Wild West, a big land-grab, which [explains] why they're doing it.
So I think with valuation, the bottom line is if you feel like you have a stock that you really like ... a business that chimes in on everything that you're looking for, yet seems like it's too expensive ... the way I look at that is I consider taking a small position. If it's a business I want to own and valuation is the only thing stopping me, there's nothing that says I can't build up a position in that company. I can buy a little bit now, follow it, and then opportunistically add when I feel like the valuation presents opportunities. That's one way to look at valuation and not let it stifle you from ever getting in on some of the best stories we've seen here at The Motley Fool.
Southwick: So when it comes to valuation, look at the quantitative as well as the qualitative...
Southwick: ...and if it still seems a bit too pricey, a little bit at a time...
Moser: I think that's a safe way...
Southwick: Ease on in.
Moser: ...to do it.
Alison Southwick has no position in any stocks mentioned. Jason Moser owns shares of Starbucks, Under Armour (A Shares), and Under Armour (C Shares). Robert Brokamp, CFP owns shares of Starbucks. The Motley Fool owns shares of and recommends Amazon.com, Netflix, Starbucks, and Under Armour (A Shares). The Motley Fool owns shares of Under Armour (C Shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.