Great companies at bad prices

July 22, 2020  | By Kevin Smith

Prices matter. In fact, we think prices matter a lot. There is a price low enough to make an unimpressive investment attractive. There is a price high enough to make an amazing investment unattractive. Today, investors in the US stock market are paying higher prices for great companies than they have… almost ever. Here are a couple of fun examples of how an amazing company can be a bad investment at the wrong price.

Coca Cola

This is an amazing company who’s products can be found all over the globe. Warren Buffet bought more than $1B of Coke stock in 1988 and it is still one of his largest holdings. He bought the stock at a great price and made a ton of money. The stock tripled in value between 1994 and 1998. If investors in 1998 were anything like the investors of today, fear of missing out drove lots of buyers to join the party, without much regard to profit. Those who bought the stock in 1998 made almost nothing up to the present day, 22 years later! During that period Coke doubled revenue and nearly tripled profits, but the investor made no gains other than dividends. This is why price matters.

1998
Share price: $42.75 on 6/30/1998

18B revenue, 3.5B profit

2020
Share price: $46.64 07/17/2020
37B revenue, 9B profit

Microsoft

The king of computers in the 20th century struggled to find dominance in the market again until the last few years, when they changed their direction and exploded in cloud computing with the Azure product. This must be one of the most impressive corporate re-invention stories of all time. During the first round of Microsoft’s greatness, an investor who held stock from 1995 to 1999 increased their value by almost 900%! Can you imagine the excitement about the stock at the time? I vaguely remember regulators talking about breaking up Microsoft because of their monopoly power, similar to what we hear about Amazon and others today.

Not every investor in Microsoft benefits from its massive growth. The price per share was $58 at the end of 1999. Investors who bought on that day made no gains on that stock until 2016! Meanwhile, Microsoft grew from $23B revenue to $91B, and from $9B profit to $21B. The company grew tremendously in size and earnings and the shareholder did not participate in the wealth creation. That is why price matters.

1999
Share price: $58 12/31/1999

$23B revenue, $9B profit

2016
Share price: $60
$91B revenue, $21B profit

Buy a great company at a great price and you may have a great investment for years to come.

Buy a great company at a bad price and you may not make anything for a decade or longer, even if the company continues to be great!

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Kevin X. Smith, CFA
512.467.2003   |  [email protected]

Kevin is responsible for advising clients for whom he is the lead financial advisor. He also manages the operations and development of the firm, and oversees all of the investments of Austin Wealth Management clients. Kevin is on a mission…Read More




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