Subject: Dealraker made a point worth contemplating: "
Dealraker made a point worth contemplating: "Time for a lengthy discussion on return on equity or how over-valued the S and P is!"

Like some of you, I have a Value Line subscription and periodically set aside time to look VL company reviews both here in the USA and elsewhere. Today I looked at UK companies as there is an article in today's Financial Times comparing and contrasting the valuation of UK listed companies versus US listed companies. I was hoping to find some eye watering possibilities and instead found what I usually find when looking at VL reports of US listed companies. What I find is something like the 98/2 rule as 98% of the companies are at best average but with debt to awful with debt. Lessening my standards to widening the field to 80/20 requires considering companies with all sorts of warts. The biggest wart of companies with P/E ratios in the 14 to 20 range is how their earnings numbers do not have a nice looking southwest to northeast plot trend. So many have little positive (upward) correlation over ten years. These evaluations are now getting dicey as I put inflation discounting onto the past two to three year numbers. A local business has seen approximately 30% material cost inflation the past three years. It has adjusted by increasing its product prices commensurately. It now shows higher sales numbers and higher profit numbers. If adjusted to inflation, those numbers do not equate to revenue and profit growth, only a flat line condition. It reflects the value of money and this must be considered when looking at graphs, in my opinion.

In my estimation, companies with good management, good revenue growth, good profit growth and little or no debt are rare. When they get cheap, the obvious strategy is to buy them. An additional investment strategy follows Jim's dictum stated back in March/April 2020 regarding buying those more doggy looking companies that have fallen the most. I did that and have a nearly seven bagger (MPC) arising from following his dictum.

Back to market valuation, in our state (NC), we have had firms owned by private equity firms suddenly close in the past two weeks with a total of about 2000 employees suddenly losing their jobs. The company in our town closed so quickly there was no meeting of the federal 60 day notice for the 850 displaced employees. The company has essentially no assets as everything of permanent value was sold and leased back, so nothing much of value to be sold to pay creditors. The story told is one of the biggest banks said no more credit line funding and it was immediate extinction. The PE company that owned this local company allegedly has $2.5B in assets in its portfolio companies.

We know of a five year old technology late stage start-up company in our town that has been talking to PE/VC firms with only one of twelve firms willing to talk with their non-profitable company. The company has growing revenues and a good market niche, just needing another three to five years to grow into its cost efficiency zone through higher manufacturing volumes and better coverage of its marketing/sales expenses. Suppose these stories are happening in the other 49 states? If so, then this may indicate a discounting mechanism is at work. First taking down the valuations of small and privately held firms and then, presumably, at later dates taking down the valuations of the doggy looking public firms mentioned in above and then lastly discounting the good looking public firms.

Higher interest rates do matter it seems.

In the meantime, I am watching my existing positions and sitting on my hands waiting for high quality companies to drop down to better prices.

How about my fellow investors on this esteemed board?

Uwharrie