To effectively influence a company's capital allocation, build a long-term relationship and privately educate management on your thought process. Avoid public activism or short-term demands like immediate share buybacks, which management teams often see through and dismiss.
The P/E ratio, like a Mercator map, simplifies a complex reality for easier navigation. However, it severely distorts underlying truths like business quality, reinvestment needs, and duration. The real mistake is forgetting these distortions and treating the simplified metric as objective truth.
A company that cannot articulate its own intrinsic value is poorly equipped to assess the value of an acquisition target. Management has more information about their own business; if they can't value it, they can't reliably value another one, making disciplined M&A impossible.
The rapid expansion promised by AI firms faces real-world bottlenecks. These include shortages of key commodities like copper, insufficient power grid capacity requiring years to build new plants, and a lack of skilled construction labor, making promised timelines highly unrealistic.
A valuation multiple like P/E is not a starting point for analysis; it's the final, compressed expression of a deep understanding of a business's economics. You must "earn the right" to use a multiple by first doing the complex work of analyzing cash flows, competitive advantages, and reinvestment opportunities.
The opportunity to short overvalued US small-cap growth stocks is greater today than in March 2000. While there are fewer public companies, a higher percentage trade at extreme multiples, with significantly more leverage and 3x higher average valuations than their dot-com era counterparts.
Data over 55 years shows international small-cap stocks are at historic lows versus the S&P 500. A mean reversion to their long-term average relationship would require them to triple in value relative to the S&P, suggesting a potential outperformance of 25% per year for a decade.
When a quality stock's price is severely depressed, a buyout offer at a 30-50% premium may still be a "take-under" relative to its long-term intrinsic value. This forces long-term shareholders to sell out cheaply, transferring the future compounding benefits to the acquirer.
In the under-followed small-cap space, physically visiting company facilities provides a significant analytical edge. Many buy-side analysts don't do this work, with some key industrial plants receiving their first-ever analyst visit from firms willing to do on-the-ground due diligence.
In small-cap investing, finding quality compounders is a better use of an analyst's time than chasing net-nets. A great business held for years requires less portfolio turnover and allows value to compound, whereas a net-net requires a sale and a new search once it reaches fair value.