Headlines and Rumors
When I first learned about valuing companies, that is trying to determine what a particular company is worth, I was told it was all about earnings. In the simplest terms, I was instructed to look at how much a money a company made, extrapolate that into the future (usually about 10 years out) and then discount that earnings flow back to today’s dollars. That was a company’s value. That was my finance training, it was math and it was good.
Then I learned the term market value and the neatness of that cash flow analysis was history. Market value is simply what people are willing to pay to own a company and, sadly, that may have nothing to do with what the company currently earns (or even realistically could earn). Market value is simply the price of the company’s stock times the number of shares of the stock that is outstanding. The price of the stock is dictated by the market, it is what people are willing to pay for the stock. And what they are willing to pay depends on a lot more than just what a company earns. It can be a mish-mash of factors, ranging from the power of a brand, who the CEO is, their projected growth, even the perceived social good the company does, It is also a product of how people feel about the stock and the stock market. Is it logical that all companies drop 10% in a stock market correction? Shouldn’t the better companies not slide as much as the poor ones? Is a slight miss of one quarter’s earnings justify a 5% drop in the company’s value? Probably not. But declines are often driven by emotions not reality.
They talk about animal spirits in the stock market. It’s an odd term but it applies. The mood this September is somber. since the height of the summer, a lot of great companies have come down in value 10-20% off their highs. While it is not clear those companies highs were justified, it is also not clear, looking at their earnings, that a 20% drop makes sense. It’s been what they are calling a rolling correction. The cautious mood has let these stocks slide. People are nibbling at the market but not jumping in with confidence. So we swing up and down, often a lot, each day.
So news and rumors have an outside impact. And if you are willing to do the work, and consider out of fashion concepts like earnings, balance sheet strength and a company’s products and potential you might just find a gem. Then when you have a day like today, when good news out weighs the bad, and rumors seem less likely to become reality, you may find you have made a tidy profit. Take advantage of headlines and rumors, but don’t let them outweigh logic. Cool heads make money.
Market Today: Up day, based rumor that China will not fall apart economically, Fed did as expected and generally things looked better than they did Monday. Calls worked today but puts were better. Closed a lot of older contracts. Old standby puts all worked: United Health (UNH), United Rentals (URI), Shopify (SHOP), Disney (DIS), etc. Another solid day. 13.3