February 4th, 2012
I’m always intrigued by those who go to lengthy extremes when comparing the Fundamental and Technical approaches to analyzing stocks. For me it’s rather simple; I consider the Fundamental approach as the one using the heart while the Technical approach uses the head. Fundamentalists point to their belief and their feelings about such factors as future earning results, growth rates and valuation multiples. Technicians point to actual historical trading results and project those results into the future assuming all conditions remaining constant.
A perfect example was a recent post by Chuck Carnevale entitled “Fastenal (FAST): A Vivid Case of Overvaluation. Carnevale’s case is that
“From 1994 to 2008 the Fastenal Company grew earnings from $.6 a share in 1994 to $.95 a share by 2008, resulting in a 23.7% compound annual growth rate. The normal PE line depicts a trimmed (the highest PE and the lowest PE trimmed) average PE ratio of 36.3, this simply indicates that the market has often priced this company at a peg ratio in excess of one. On the other hand, it is clear from the picture that the stock price often moved above and below the normal PE, and in many cases traded at its orange earnings justified valuation line…
…since calendar year 2010, Fastenal Company has grown earnings at the average rate of 33.9% per annum. This accelerated earnings growth should be considered as coming off of the low base which was created by the recession of 2008. Furthermore, we believe this accelerated earnings growth greatly attributes to the company’s current abnormally high PE ratio of 37.8. In other words, the market is valuing this company very optimistically..
…assuming that the estimates from the various analysts are within reason correct, then we would argue that this high-quality company, with no debt on its balance sheet, and a great record of earnings growth, is nevertheless very expensive today. We believe this is also apparent in the context of the fact that there are numerous other companies with similar operating histories, and dividend yields that are trading at PE ratios one-half to one-third of what is currently being awarded to Fastenal Company. “
Carnevale includes a number of tables and charts depicting the relationship between the earnings and sales growth with the stocks price history from 1994 to 2017 … yes 2017 to make his case.
As an individual investor, I like to keep things simple. Why pay good money for expensive services to give me all sorts of information about individual companies and their stocks without talking about market conditions or the rotation of the big money into various industry groups? It would be better to make my own decision using basic and readily available charts like this one on FAST:
An unequivocal ascending channel since 1994 with parallel trendlines and, yes, FAST is approaching the upper trendline. If the stock continues to rise at its current rate then, after another 16% move higher, it will touch the upper boundary at around 56. A slower ascent will allow a slightly higher touch point. My conclusion is that one can get another 16% gain before the “overvaluation” becomes an issue.