Why Great Companies May Not Be Great Stocks
“Obvious prospects for growth in a business do not translate into obvious profits for investors.”
— Ben Graham
Wall Street is full of potholes and danger signs. There are puzzles, paradoxes and anomalies in the stock market that often defy explanation.
For example, there’s the “growth trap” that Jeremy Siegel, the “Wizard of Wharton,” warns about in his book “Stocks for the Long Run.” Why is it that growth stocks often disappoint investors?
Peter Lynch, who ran the most successful mutual fund for 15 years (Fidelity Magellan Fund), said that the most frustrating part of his business involved so-called growth stocks — they often didn’t do as well as everyone expected.
Twitter is a good example. It’s a media darling. It makes front page news every day when President Trump issues a line or two from his Twitter account. He has 2 million followers, and other celebrities have similarly big numbers.
And yet the stock price still has not exceeded its high of $63 a share back in 2013, even though five years has passed since then. It has been moving up lately but still has not been a blockbuster stock — despite all the hype.
The problem is that too many investors chase growth stocks and pay too much. Generally, the price to earnings (P/E) ratio for growth stocks is too high! Indeed, the trailing P/E ratio for Twitter is over 2,200! Fast-growing companies often fail to meet high expectations.
That’s just one example of the puzzlers we are going to discuss and resolve at this year’s Fast Money Summit at FreedomFest, July 11-14, at the Paris Resort in Las Vegas. The multi-day event starts in four weeks and I can’t wait!
We will have a special session on “Puzzles and Paradoxes in Investing,” and will give you the surprising answers to questions such as:
- Why did most shareholders LOSE money in the Magellan Fund, the most successful mutual fund run by Peter Lynch?
- Why do stocks that pay rising dividends tend to grow faster, and not the other way around?
- Why do stocks with high dividend payout ratios do better than stocks with low payout ratios? Shouldn’t it be the opposite?
- Why do publicly traded companies with clever stock symbols (such as LUV, MAIN and TEAM) often do better than stocks with non-memorable symbols?
- How it is possible for monkeys throwing darts at stock pages to consistently beat the market index? (Known as Burt Malkiel’s Monkey Paradox).
Financial gurus such as Rob Arnott (“godfather of smart beta”), Pomona Professor of Finance Gary Smith, the Oxford Club’s Alex Green and Marc Lichtenfeld, Money Map’s Keith Fitz-Gerald and Asian guru Jim Rogers will be there to discuss and resolve these fascinating puzzles on Wall Street.
Plus, don’t miss the final day of the Fast Money Summit when John Mackey, CEO of Whole Foods Market, will reveal “Investing on the Run: How I Became a Successful Part-Time Investor Running a Full-Time Business.” He will be followed by Steve Forbes on “My Favorite Way to Invest in Free-Market Capitalism,” prior to a private reception with the former presidential candidate. For full details on the Fast Money Summit, click here.
You Nailed It! Federal Judge Rules in Favor of AT&T/Time Warner Merger
You would think that under President Donald Trump, the Justice Department would have better things to do than to interfere with free enterprise, especially when academic studies have shown the futility and negative impact of antitrust actions.
Yet believe it or not, Trump and the antitrust cops tried to deny the $85 billion merger of AT&T (NYSE:T) and Time Warner (NYSE:TWX) on the flimsy argument that the merger would be uncompetitive. According to the Trump administration, AT&T could use its new market power to raise prices exorbitantly on cable and satellite operators that want to run Time Warner TV programs — such as CNN broadcasts or HBO shows. The government’s lawyers argued that consumers’ cable bills would go up if the merger went through.
Of course, that’s nonsense. As Steve Moore wrote in today’s New York Times, “The absurdity of this argument is that the Justice lawyers seemed to be stuck in the 1980s. In 2018, the number of American households getting their television or video entertainment from traditional cable providers is declining. The very notion of “watching TV” is becoming as obsolete as listening to music on a turntable. My teenage kids and their friends don’t even own TVs. They watch “Game of Thrones” on their computers or smartphones, and one of their favorite “channels” is YouTube. They can choose from thousands of programs at a very low cost. Today, any hotshot with a camera and a Facebook page can be a media company. Is that enough competition for the Justice Department?”
Moore concluded, “These are two American companies merging to gain profitability and global market share. In this way, the merger helps put America first. Someone, please tell the lawyers…” and President Trump?”
Fast Money Summit and FreedomFest Are Just One Month Away!
It all starts on Wednesday, July 11, at the Paris Resort, Las Vegas, and runs through Saturday, July 14. Over 1,100 people already have signed up for “the world’s largest gathering of free minds.” If you haven’t attended, you are in for a treat. We’ve now posted the entire schedule online at https://www.freedomfest.com/agenda-3/.
Plus, we just confirmed a new speaker. Yeonmi Park, a North Korean defector who has shared her journey to freedom in a book called “In Order to Live.” She will give us her views on the impact of the historic summit between President Trump and North Korean dictator Kim Jong-un.
Now is the time to sign up. Our discounted room block ends this week! Save $100 on the registration fee by using coupon code EAGLE100. Sign up here at www.freedomfest.com/register-now/ or call toll-free: 1-855-850-3733, ext. 202.
