We know that in long term share price follows business development. When business is twice as big we should expect that share price will also double (more precisely we should expect enterprise value to double, also it is important what measure you take to calculate business size, for me the best is net profit). The other reason for share price to rise/fall is multiple expansion/contraction. If the same company is traded 10 times earnings and then rerating comes for 15 times earnings then there is a 50% gain with no growth in business. This multiple changes are in fact only due to sentiment changes.

I thought about it when I last looked at Cintas. There are also many other cases. Let’s have a look:



Five year performance +240% (around, with dividends)

EPS growth vs 2017 estimates vs 2012 + 67%

Strong outperformance.


Illinois Tool Works:


Five year performance +170% (around, with dividends)

EPS growth vs 2017 estimates vs 2012 -25% (!), maybe there were some one offs, but there is huge rerating. I do not include buybacks, which might significantly influence long term performance.



Can such multiple expansion last forever? I don’t think so and there are some example to show, that although business is doing well something has happened and returns from shares are much lower/negative.

Hormel Foods:image006

Although EPS is growing (and is expected to grow in the future) we can see that shares are flat/negative. Is there something wrong with this name?

No! It was simply too expensive and now shares are waiting for business to grow and justify valuation. Always keep in mind that price is what you pay, value is what you get. In this case shares were rising faster than business and now there is a need for business to grow faster than shares.


On the other hand let’s have a look on Tesla:


Generally we can assume that Tesla business is growing. There are some cars produced so far, volumes are rising etc. Now compare share price in 2013 vs 2017. In the peak in 2013 share was at the same level as in December 2017. Now compare company – it is far more developed now! What does it mean? Well simply, in 2013 shares were too high vs business. Then business was catching up and in the end of 2017 probably business was ahead of share price. This might justify rerating and last growth.


What’s the lesson? Always look both on business growth and valuation. In long term business must grow to generate value and in short term if you spot that market strongly overreacted then there might be some buying opportunity.

I like to read my old posts why I bought shares and compare it. Let’s give an example of Apple – I guess that Apple is somewhere in the end of product cycle -> there will be new premieres soon and results should increase. Iphone7 has come, results increased, share price is up by 20%+. Wasn’t it a no brainer to buy Apple then?

Do you see any companies where intrinsic business value is much above current share price? Let me know, maybe it is time to buy them!