Ignoring Valuation: Costs Time and Money

Experience is the best teacher... but tuition can be expensive

Thomas Macpherson is one of my favorite authors here on Guru Focus. His articles offer valuable insights into how real world money managers make buy-hold-sell decisions.

Thomas is an Ivy League educated value investor and the very successful managing partner of an investment firm.

Nintai recently sold its entire long-term holding in Factset Research Systems (FDS), a position held since June of 2005. They did so because the stock now appears overvalued.

I use a somewhat different methodology in evaluating the shares before arriving at the same conclusion.

Use the link below to see Thomas’ commentary on Nintai’s decision.

Changes In The Nintai Portfolio

Knowing a stock’s valuation history is a very powerful tool. During 2007's market euphoria FDS peaked at $74. The shares traded for almost 35x that year’s earnings while yielding just 0.4%. Factset’s 2007 EPS ended up at $2.14.

By definition, not selling at that valuation turned out to be a mistake. At Factset's 2008 low it could have been repurchased for less than $32. At that time Factset was available for under 13x earnings while sporting a 1.73% current yield.

The stock didn’t permanently break above its 2007 pinnacle until two and a half years later. Hanging in there from 2007’s high proved to be a huge lost-opportunity cost.

Early 2011 saw another valuation surge in FDS shares. That spring the stock rose to north of $112. At that price the multiple was 30.9x forward projections and the dividend rate was 0.89%. Final 2011 EPS came in at $3.64.

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