Compounders: A Higher Price Can Be Less Expensive

We learn from making charts every day in our offices. Rather than listening to complicated opinions on what should be happening, simple data clearly reveals what is happening.

What you see here is a valuable lesson, not a recommendation. We were lucky that our homework led us to begin purchasing this company’s shares in our partners’ Compounders accounts in the summer of 2009. It’s what has been happening recently that is catching our eyes again and might surprise many investors.

A stock like this one is seeing its price move considerably higher while it’s getting cheaper at the same time. That happens if the earnings have been growing even faster than the price. The purple line is a simple measure of a stock’s valuation: price divided by operating earnings. In fairness, this stock has been a historically good compounder. But it is not alone, and why we wanted to share one glimpse of what can be happening under the surface headlines, so that the next time you hear “the market is too high…” you may have this in mind while you smile. It may be, and there are plenty of risks. But there are also unique compounders whose price can be higher, and at the same time it may be a better value.