Thursday, November 15, 2012

Company Delivers But the Stocks Don't?

Walmart and Coca-cola have performed nicely over the last several years but the stocks haven't. Walmart's revenues and profits have increased greatly since 2000 with earnings per share increasing from $1.25 to $2.72 but the share price hasn't reflected it. Coca-cola has grown earnings at a decent rate and the shares are flat. This rattles me in a way although I realize stock prices aren't efficient and even in many cases sensible especially in the short-term. It means that the expectations investors had for these companies I suppose didn't live up to what was expected. The stocks were somewhat overvalued but not that overvalued.

Walmart hasn't done a perfect job of allocating capital. They pumped a lot into marketing without any huge improvements in higher priced product mix like Target. Walmart has its niche as low prices only compared to Targets more diverse offering of higher priced items. Walmarts position and model should serve it well though and certainly has in the past.

This questions my ideologies. Warren Buffett and many great investors have said if a company does well the stock eventually follows. Some people think management is responsible for the stock price by giving returns to shareholders like at Disney and that Home Depot's ceo was responsible for HD's poor share price performance and complained. What more can management like Walmart's, Home Depot's and Coke's do than grow shareholder equity and earnings while maintaining its competitive position? In general isn't this why business value and investors stockholder equity grow? Does a great company's share price in traded capital markets have to rise over time or is it all dependent on psychology? It seems the investors desire to own a company via its stock is unpredictable and therefore so is the stock price EVEN WHEN THE FUNDAMENTALS ARE TAKEN INTO ACCOUNT. Psychology makes the markets inefficient and are responsible for investing being almost as much art as science. One of the most common defenses of the market being ineffecient is that a company trades because of earnings and earnings growth discounted for the future. I think examples like this might debunk that explanation.


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