Q2 2018

My Thoughts on Valuation 2018

As we settle into 2018, I’ve been giving some consideration to valuation.  Specifically, what we can expect for the year ahead.  Having now had the opportunity to review the returns obtained by fellow investors it seems clear 2017 was a very good year indeed.  My 42.72% return, as outlined here, was, for me, exceptional and unlikely to be matched this year.

But with such a large run-up last year, are equities expensive?  Are we, dare I say it, approaching a bubble?

CAPE

Beginning with the CAPE ratio for the UK, the excellent data source Starcapital.de has the UK as a whole at a CAPE ratio of approximately 15.7.  The FTSE All Share is a little higher at 17.3.  Whilst this isn’t defined as ‘cheap’, it certainly is towards the ‘cheaper’ end of the CAPE scale.  In fact, it is the 13th cheapest country listed on their site.  Compared to the long-term average of around 15-16, this would suggest the UK is, at worst, fairly valued.  I would suggest you read the excellent valuations from John Kingham of both the FTSE 100 and the FTSE 250.

Nick Kirrage has an excellent chart on Cityam.com which compares current valuations to past peaks.  The current CAPE ratio is reasonably low compared to previous market highs:

Valuation 2018
Source: Cityam.com

Equity Valuations

I don’t see much irrationality at the moment.  When I think back to the 70’s, and the view regarding the high quality “nifty fifty” growth stocks, we’re nowhere near that.  The suggestion was that buying and holding these quality, growing companies was worth it at any price.  Unfortunately, this meant paying for Polaroid at 91 times earnings, Disney at 82 and McDonalds at 86.  As it turns out, doing exactly that  actually worked out in some instances.  Unfortunately it most definitely did not in others.

The point is, growth at any price should be avoided.  And I see little evidence of that mentality as a whole at the moment.  Some of the traditional large cap, quality companies aren’t trading on ridiculous valuations.  For example, Unilever trades at 23 times earnings.  British American Tobacco, 22x and Reckitt Benckiser, 23x.

Even smaller cap, faster growing companies are, by and large, reasonably priced.  Bioventix, for example trades at 26x, XL Media, 22x and Somero Enterprises 15x.  Every company listed here posts five year average returns on investment of over 15%.

We’re not paying any price for growth, yet.

Enforced Exuberance

I heard something interesting on the awesome new podcast Animal Spirits hosted by Michael Batnick & Ben Carlson.  They mentioned that equities are largely being bought because people are seeking a return they can’t get anywhere else.  This made me think about Bitcoin and the attitude towards that versus stocks.  The US markets are expensive, this seems apparent, but I’m not sure people are necessarily buying equities anywhere just to get in on the ride.

It appears largely impossible to ‘value’ Bitcoin, and yet people are buying at a frantic pace.  The pure hope is that the price goes up, so that they can sell and make money.  Therein lies the difference.  People (largely) buy equities in the expectation that they will continue to perform and increase in value.  People (largely) are buying Bitcoin in the hope it goes up in price.

The nifty-fifty and the dot-com bubble gave rise to unsustainable valuations because they were supposedly worth it at any price.  This has since been proven to have been fallacious.

Finally…

I’d be interested to hear your opinions, but for me I think now is a good time to be buying equities.  Let me know your thoughts.

Happy investing!


Leave a comment below, or find me on Twitter @BritishInvestor.

Somero Enterprises is a constituent of the portfolio.

10 thoughts on “My Thoughts on Valuation 2018”

  1. My thoughts on valuation multiples is they can always go a lot higher than you think!

    Thanks for the podcast link. Another one to add to the list!

  2. You won’t be surprised to hear that I agree with you! UK equities are not especially expensive, although of course that doesn’t mean they can’t go down.

    One worry doing the rounds at the moment is that since the US is very expensive it could crash, taking the UK with it. I think that’s a reasonable concern for short-term investors, but for long-term investors it means the UK market would become cheap and therefore (probably) a good buying opportunity.

    1. Thanks as always for the comment, John.

      I share your concern at US markets having the potential of bringing down UK markets. I’ve asked Meb Faber about this in the past and his response was that the CAPE is more an indicator of future returns. Whether it is where it is now, or lower due to the US, forward returns look more than adequate.

      Chriss

  3. I have been looking taptica for the last few days And i would like to know why companies like Amazon or Facebook need taptica ? Why FB cant steal tapticas business , FB has a larger client data i dont understand why they need taptica
    Why the smaller companies nned taptica for advertising purposes? They could Contact FB or other bigger marketing companies right? Please help me out with this

    1. A very valid argument, John. And there is absolutely the risk of a Facebook venturing into this business.

      However collaboration with Facebook is just one component of what Taptica offer. Companies use Taptica because of their presence across a number of advertising platforms, not just Facebook. Advertisement within mobile applications, for example. If Taptica’s business is disrupted, I can imagine it being due to their acquisition, rather than them being muscled out.

  4. Great article , What are your thoughts on the impact of a possible recession to taptica PLC ? That would hurt their revenues because marketing expense is reduced while un recessions
    What perra did you find similar yo taptica And What do you think is taptica competitive advantage VS the peers?

    1. I think you’re right when you say a recessionary environment would potentially impact revenues, but I’d argue Taptica are one of the better placed companies to weather the storm given the cutting edge advertising space they occupy. More traditional advertising channels would be the first to suffer, I would think.

      Not entirely sure what your second question is, but in my view their advantage comes from the proprietary tech and large user database they possess. With over 200m users in this database it is not something a competitor can easily (or quickly) replicate. It should also be something that grows exponentially.

      1. Thank you very much , your articles really help me out
        Sorry if the first question wasnt clear i wrote it in the phone and the screen is quite small
        I saw wondering about taptica peers i dindt find many competitors , basides maybe xlmedia , did you find other competitors in the mobile ad business ?
        I think mobile marketing is call for huge growth so i found it extrange when looking at competitors cause i dindt find many besides xlmedia , if you could help me with this i Will be very gratefull
        Thanks mate

        1. Hi Jonas

          I’m yet to find any publicly listed companies that directly compete with Taptica. XLMedia are in that field but their operation is quite distinct from TAP. There is Mojiva, a private firm in the US that operates in the same mobile ad space but I don’t know much about them.

          You also have InMobi, an Indian firm operating in the video advertising space (which TAP is getting into via their acquisition of Tremor Video). Again a private equity company, but arguably one that more directly challenges Taptica.

          Hope that helps.

          Chriss

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