19 Mar COTW: No Revenue, No Problem
The chart below can be downloaded here.
There is no hard-and-fast rule, but “story stocks” are generally defined as those trading at prices substantially out of line with current fundamentals (revenue, earnings, cash flow, etc.) as a result of a positive story that suggests larger profits down the road.
The chart below (h/t Matisse Capital) shows the performance differential from early 2014 through February between high price-to-sales stocks and the broader market. The teal line is a simple average of over 100 companies totaling over $300 billion in market cap that meet that definition. As interest rates rise, we are finding more opportunities to generate what we believe are attractive returns in areas that rely less on stories about the distant future.
We love a good story as much as the next person, but we also love investments that generate cash flow today. We believe opportunities in the latter are underappreciated relative to the former.
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