FNArena’s Weekly Insights – April 12 2021
In this week’s Weekly Insights:
-Inflation?
-A Golden ‘Value’ Opportunity
-One Giant Data Leap Forward For FNArena
-Research To Download
Inflation?
By Rudi Filapek-Vandyck, Editor FNArena
A lot of what happens in the share market, in particular this year, relates to relativity and simple mathematics; both I feel are not necessarily well understood, let alone fully appreciated by many an investor.
To illustrate my point, let’s imagine a company called XYZ; bear with me, it’ll be worth it.
XYZ previously reported profits after tax of circa $100m but due to a series of misfortunes that has now shrunk to $25m and the share price reflects this. The usual scenario unfolds. The board appoints a new CEO, who brings in a new broom, takes write-offs, announces a restructuring and new plans are being communicated and executed.
The following year net profits rise to $50m, an increase of no less than 50% from the disaster year everybody likes to forget. A turnaround is in motion!
Soon investors are back on board and the share price reflects this new enthusiasm.
As it happens, the new management increases profits by $25m in each of the two following years, which results in big share price gains and a valuation that is fully reflective of this newfound growth momentum.
Happy days are here again!
Of course, any cynic can see what is happening here, the company is simply back to where it was four years ago. Hopefully it now operates from a better condition and market position, but certainly the share price multiple is now significantly higher. The following year, however, net profits come out as $102m.
Does this now mean the narrative that built on the back of three consecutive years of strong growth achieved was wrong? Or was it correct for as long as it lasted?
