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Mind the gap: Some company valuations make no numerical sense

Markets are willing to believe companies are worth far more than their fundamentals would suggest, and this behaviour will be a major investing theme in 2021 according to Dean Fergie.
Markets are willing to believe companies are worth far more than their fundamentals would suggest, and this behaviour will be a major investing theme in 2021 according to Dean Fergie. Mr Fergie – director and portfolio manager for Cyan Investment Management – said current markets are full of anomalies which “just make no numerical sense whatsoever”. Afterpay and Tesla are prime examples, he said, noting both companies’ valuations are considerably larger than their peers in the finance and motor manufacturing sectors respectively. This divide likely stems from a large contingent of ill-informed day traders buying and selling companies on the back of their greed and fear, he said.
This share price ‘momentum’, unrelated to the fundamentals of the company’s underlying operations, will be the biggest investing trend in 2021, Mr Fergie said.
“You just have certain sectors that are capturing the market’s attention and that are going very strongly, and others that investors don’t seem to want to know about and are just floundering,” he said. This type of momentum is especially prevalent in the small caps sector, he added. Dean Fergie will be joining us for ‘The Insider: Meet the Fund Manager’ on Friday 12 March at 12 pm. Book here.

Art vs science

Mr Fergie said the dislocation of valuations from a company’s underlying fundamentals mean numerical analysis of stocks are becoming less reliable. “It’s becoming more the case that you can’t sit down and crunch a bunch of numbers and expect those outcomes to come out like you think they can,” he said.
He added that “the investment game is probably as much art as science” in the current conditions.
Nevertheless, Mr Fergie and his colleagues at Cyan Investment Management still adhere to a few rules when picking stocks – rules which have helped him deliver annualised returns of 15% over the past 6 years without his funds’ volatility rising much above that of the All Ords index. The first rule is to stay away from companies he and his team don’t understand – notably, this precludes most biotech companies. (Mr Fergie added that he views most biotech companies as being too risky regardless of understanding as they are too binomial; “a drug is either approved, or it’s not”.) Cyan also tries to avoid resource companies because they are subjected to “externalities” like fluctuations in commodity prices. Instead, Mr Fergie and his team look for businesses which have revenues and earnings, which sometimes pay dividends, and – often – which have a catalyst for a re-rating.
And importantly, Mr Fergie focuses his attention in the small cap space.
“My philosophy has been that the greatest returns can be achieved by looking at the smaller stocks,” he said. “By definition, something that’s smaller can grow faster than something that’s larger.”    Dean Fergie will be joining us for ‘The Insider: Meet the Fund Manager’ on Friday 12 March at 12 pm where he will provide an overview of market themes, trends and insights, followed by an interactive Q&A. Book here. ‘The Insider: Meet the Fund Manager’ is a free webcast series which gives you direct access to prominent fund managers. This session is live and interactive and includes a live Q&A. Spots are limited, so please book into this session as soon as possible.   Past performance is not a reliable indicator of future performance. Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets position. Any advice contained within this presentation is general advice and does not consider your personal circumstance, you should consider whether it’s appropriate for you. The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.  

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