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Eric Houssels
Eric Houssels
Articles (9)  | Author's Website |

Valuation and Growth Approaches in the Current Market

February 25, 2011 | About:

There are two basic ways for the fundamentals-based investor to make money.

The first method is the value or, more accurately, the valuation-centric method. This is the method used for those situations where a company is heavily discounted based on normalized earnings, or there appears to be a very real opportunity to release or convert valuable assets to better use (i.e. achieve higher ROA on them) and this can include the release of cash for cash-heavy balance sheets. Again, a substantial discount to fairly “easily” recognizable worth must be present. During bear markets, valuation-centric opportunities abound and can be found in even some of the Class A truly great blue-chips (I would argue that these eras represent Warren’s preferred juice-dripping-off-the-bone, deliciously fat pitch). During bull markets, I have found valuation-centric opportunities to occur less frequently and usually with considerably more hair on them. A cloud often hangs over an industry or company – a la healthcare, a la Medtronic or J&J currently. The fairly “easily” recognizable discount to worth occurs more frequently in the small and very small, often semi-liquid, companies. It is in these small companies that I am finding some value presently. Clearly, this latter stage of the mini-bull can find valuation-centrists reaching further from the quality of simply buying KO at a panicked, bear market’s 13x earnings; we must tread carefully.

The second method (surprise, surprise) is the growth-centric method. The growth-centric strategy is simply to be in those companies whose earnings will grow at a strong pace for many years to come. While there are limits to what we can pay for them (as there are always limits to everything), valuation is unquestionably a secondary concern. Paying 30x earnings for GOOG’s earnings in 2004 would have turned out spectacularly in 2010 as these earnings have rocketed at a 20% CAGR. The trick with the growth-centric approach is one of business acumen – you must be right about the strong growth of the business-in-question’s profitability over a considerable amount of years. The trap is that capitalism often (certainly more often than not) competes away the early reaper’s superior returns, or, in other words, true moats to competition are as valuable as they are rare. A further challenge to this approach is that paying the rosy price of a business going gangbusters will, if proven to be but temporary gangbusters, result in material capital destruction (i.e. a cratered stock price) – just ask any tech investor from 2000 what happens when the tree no longer grows to the sky.

As stated, I believe we are in the latter stages of a mini-bull cycle, and I find my preference for valuation investing leading me to reach further and further out on the quality and capitalization/liquidity continuum for ideas…for valuationists, in other words, it is currently slim pickings. For growth investors, ideas will still work here provided you are right. Caveat emptor applies especially for growth at this time; for, if you are wrong, it is a certainty you will have less capital for those future fat, or at least non-lean, pitches bound to cross your desk.

About the author:

Eric Houssels
Eric Houssels is the co-founder and managing member of Houssels Capital Management, LLC, a money management firm based in Las Vegas, NV. The firm focuses on investments in the stocks of publicly-traded companies of all capitalizations that possess, preferably, significant earnings power or, alternatively, assets that can be (re)deployed to achieve significant earnings power and are trading at reasonable valuations. Houssels Capital Management was founded in 2000.

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Rating: 2.5/5 (4 votes)


Adib Motiwala
Adib Motiwala - 7 years ago    Report SPAM
Eric/ GuruFocus

The link to the website for Houssels Capital Management,is broken.
Ehoussels - 7 years ago    Report SPAM

Thanks, should be working now

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