Boy, doesn't take much for long-duration growth stocks to get spooked by inflation these days.
Just a rise of few dollars a barrel in the oil price is enough to do it, such is the skittishness in capital markets.
(Obviously a lot of investors around the world who have never operated in an inflationary world until 18 months ago.)
No matter.
The outworking of it is that it has left CSL trading on a 12-month prospective P/E of around 26 times.
For fun, I've gone as far back as I have numbers to see what indications are offered by precedent valuation multiples, specifically by plotting prospective P/E multiples for the stock, against subsequent 12-month investment returns:
View attachment 5606039The chart is self-explanatory, although it contains a few salient features worthy of highlighting:
1. The majority of the time the stock has been rated by the market at sub-35x prospective P/E. The extreme was the crazy 2020 period when the multiple averaged around 46x (at one stage it touched a nosebleed 50x).
Despite some, intoxicated with the CSL Can-Do-No-Wrong Kool-Aid, arguing at the time that there was nothing untoward about a near-50x P/E multiple, the subsequent under-performance of the stock is plain to see, having undergone an uninterrupted de-rating during 2021, 2022 and 2023.
Objectively, almost four years is an inordinately long period for a market darling to under-perform, and it has left the stock trading on a P/E of ~26x ($256 share price divided by expected EPS of US$6.30 (consensus) divided by the 0.64 exchange rate) - this is denoted by the vertical, dotted grey line on the graph.
2. As can be seen, 26x P/E is the lowest multiple in 8 years.
3. Also, in the past whenever the stock's multiple has been higher than it is today, the subsequent 12-month returns have been negative around 70% of the time (five years out of the seven - the exceptions were the extraordinary 2018 and 2019 years, which coincided with collapsing risk-free yields).
4. Importantly, whenever the stock's multiple has been at, or lower, than the current level, the stock has yielded positive returns (nine out of the eleven years reviewed... and the two years when the stock price fell was due to major extraneous factors, namely 2009 (the GFC) and 2011 (when markets wobbled during the Greek debt crisis.))
So, it's a crude exercise I know, but experience has taught me that successful investing requires only getting things approximately right (as opposed to 100% wrong), and based on the picture above, I feel that the CSL set-up now offers asymmetric upside-downside investment outcomes.
Accordingly, I increased my position again today.
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(20min delay)