Stock Prices Disconnect from Business Performance
The last twelve months have been an unusual period for Dock Street portfolios. While we have booked decent gains in the neighborhood of 10% for our stock allocations, those gains in no way capture the value created by the businesses we own.
Stock prices are composed of cash profits (e.g., cash flow) and how investors feel about the profits. Cash flow is where we focus our attention. CNBC, in contrast, is focused on those investors’ feelings.
The chart below illustrates how those two factors have produced the results for the stocks we own. Starting at the bottom of the chart, cash flow is up over 55% for the last 12 months—awesome. But the series in the middle shows that investors have been skeptical of that growth and are currently paying nearly 30% less for that cash flow compared to a year ago. The result is the top series; stock prices are up only 10% from a year ago.
Business is up over 55%, while the stocks are up only 10%. What gives?
One Year Chart of Business Growth and Stock Price Movement
Starting from the top, Stock Prices are up 10% for the year, the Price to Cash Flow is down 30%, while Cash Flow has increased by 55%.
The market has been highly skeptical of profits generated by the AI revolution. For many investors, this feels a lot like the Internet bubble of the late 1990’s. They are expecting the current strong growth in profits to slow or even reverse.
We don’t share this view of these businesses in the next few years. This is not the DotCom bust, it’s more like the invention of semiconductors in the 1970s combined with the early stages of the Internet in the 1990s.
The next 12 months will likely determine who is right about this—the AI skeptics or investors like us who expect massive opportunities for the businesses we own.
Best regards,
Daniel A. Ogden
Dock Street Asset Management, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. You should not assume that any discussion or information contained in this letter serves as the receipt of, or as a substitute for, personalized investment advice from Dock Street Asset Management, Inc.
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