Brandon Snow's blog

U.S. equity valuation and implied returns

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Here is a quick discussion on multiples from our Strategist, Bob Swanson.

Recently, some attention has been placed on market valuation. Here we attempt to relate valuation to subsequent equity performance. The most common measure of valuation is the price to earnings ratio (P/E). Cambridge evaluates both the historical and projected P/E ratios. Today’s P/E ratio, based on the prior 12 months, is 17.9x while the 12-month forward P/E is 16.5x. Both of these measures are slightly above historical averages as seen in the chart below.

Cash is offence, stock picking is defense

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One of the comments that we frequently hear has to do with managers “raising cash” when they get defensive. We find it comical when we are told that someone has shifted from 2% to 8% cash in their portfolio because they are bearish – what really matters is the 92% of the portfolio that remains invested!

Sharpening Our Views on Income

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I wanted to pass along some comments from our macro team:

Since the end of the financial crisis, bonds have outperformed equities on a risk-adjusted return basis. We measure risk-adjusted returns via the Sharpe Ratio. Put simply, the higher the Sharpe Ratio the better the reward (i.e. total return) relative to the volatility. However, looking forward, we believe equities have a better balance of risk/reward over bonds.

Update from conference in Orlando

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Every year, I attend the Raymond James Institutional Investors Conference in Orlando, Florida. The conference includes presentations by senior management teams of more than 200 companies across all industries, and I had the pleasure of meeting with over 20 companies during the last few days. This gave me the opportunity to check in on a number of portfolio holdings – and I am excited to have found a half-dozen potential new ideas.

Here are some of the highlights from my time at the conference.

Portfolio Update/Weather Matters Again

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Portfolio update: The markets entered the year with high expectations for equities which have recently come back down to earth. The trigger for the “risk-off” trade was the pressure on emerging market (EM) currencies (and bonds by proxy) which rippled through consensus longs in Japan and U.S. equities, and shorts in treasuries and gold. We have also seen some less-than-stellar economic data points out of the U.S., which has exacerbated the sell-off. As many of you know, we always worry about what can go wrong.

Lessons from Intrawest

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One of the mistakes I can look back on from early in my career was with a stock called Intrawest. I started covering the company in 2004 and felt that it was not particularly well managed at the time and that its stock was overvalued. It spent most of 2004 between $20 and $25, but began moving higher in 2005. I remained negative while the portfolio managers I worked for (namely Alan Radlo) were on my case as the bull scenario was playing out and the stock continued to rise. The bull thesis centered on the value of “irreplaceable” assets and the real estate pipeline.


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