{"text":[[{"start":6.74,"text":"The writer is founder and chief executive of Trivariate Research"}],[{"start":11.47,"text":"Many of us in markets were reared to believe that the key to investing in stocks was to buy low and sell high. We buy our little dream today and sell it to a someone with a bigger dream later. That philosophy implies that buying stocks with a cheap valuation, on metrics such as price-to-forward earnings, or with high free cash flow yield, is important. The truth is, though, that in most cases such an approach has been declining in usefulness for stock selection and over-reliance on it can destroy value."}],[{"start":45.769999999999996,"text":"Three years ago, artificial intelligence was not on most investors’ radar screens. Now it is influencing nearly every investment decision and it is a big reason why a valuation metric-based approach to investing won’t be as effective for stock selection for the coming year."}],[{"start":64.91999999999999,"text":"It not hard to see why. Look no further than semiconductor giant Nvidia’s quarterly revenue over the past two and a half years. The actual reported revenue growth seems almost preposterously high. From $6bn in the first quarter of 2023, revenue is expected to hit $60bn in the first quarter of next year, according to consensus forecasts."}],[{"start":91.11999999999999,"text":"Sentiment might turn on AI eventually, but it is too early to get bearish on its impact. The direct revenue beneficiaries from AI growth are likely to produce solid fundamentals that will probably last for several years. In addition, there are also many stocks that investors consider to be potential productivity beneficiaries from AI. Through it, these companies can better predict their employee and customer behaviours, avoiding substantial hiring to drive profit margins higher through efficiencies."}],[{"start":126.41,"text":"We have seen how increasing net margins can have a significant impact on share prices. One notable case is the membership-only retailer Costco, which saw its share price reached a multiple of more than 50 times its forward earnings estimates last year as confidence on its margins improved."}],[{"start":146.45,"text":"There are also those companies with revenue models that appear to be relatively impregnable to AI. Industries such as select utilities, waste disposal and aggregates come to mind. We believe such robust companies will continue to see their valuation multiples expand given that long-term earnings estimates and growth rates are more likely to be achievable."}],[{"start":171.73999999999998,"text":"Finally, those companies that are seeing their business models disrupted by AI are likely to remain under pressure (and optically cheap). Take Getty Images as an example. This is one of the world’s largest providers of stock photography, video and music. Today’s abundance of AI-generated and free imagery has undermined both its pricing power and growth. This stock has therefore seen a consistent contraction in the multiple of its enterprise value to forecast sales."}],[{"start":null,"text":"
"}],[{"start":205.51999999999998,"text":"If an investor is betting on a mean-reverting approach of buying low and selling high based on valuation, all they are really doing in the current regime is divesting companies that have a higher probability of benefiting from AI and investing in those that have an increased likelihood of being disrupted. We think that is a foolish strategy and is the reason that valuation is unlikely to be effective for stock selection."}],[{"start":232.65999999999997,"text":"There are some other forces that have caused this phenomenon as well. In contrast to the 1980s and the 1990s, more funds are being driven by growth in quantitative investing and trading with a time horizon measured in hours or days instead of quarters or years. These strategies are often intentionally valuation neutral — taking long and short stock positions on the basis of market trends, happily indifferent to traditional valuation metrics. This has increased the momentum effect driving prices and markets."}],[{"start":268.4,"text":"With that as a background, we would still offer some words of caution on eschewing a valuation based approach of buying low, selling high. First, extremely expensive companies should be avoided. In fact, companies that have reached the most expensive decile of price-to-forward earnings multiples do subsequently lag behind (the cheapest quartile also materially lags)."}],[{"start":294.63,"text":"Second, investing is sensitive to changes in the perceptions of growth and rates. In 2022, for example, a hawkish Federal Reserve and interest rate rises had a statistically significant impact on valuations with multiples contracting as investors became more conservative. While markets are now expecting rate cuts, that could change. Third, valuation might fail to be useful in timeframes of less than three years, but could still be valuable in longer horizons, such as 5 to 10 years."}],[{"start":330.73,"text":"While extremes and long-term horizons still matter, near-term investing success depends more on growth durability and margin expansion than on cheapness."}],[{"start":349.51,"text":""}]],"url":"https://audio.ftmailbox.cn/album/a_1757667509_8491.mp3"}