RE: SLP dividend10 Feb 2023 10:53
I`d be very wary of Simon Thompson`s stated returns. In his article Bargain Shares 2023 under Arix he states that tech companies are valued using the 10 year risk free rate: [!!]
"An equal-weighted index of US biotechnology stocks declined 21.5 per cent last year, the reversal coinciding with the steep rise in 10-year US Treasury yields, the preferred discount rate used for valuations."
That is just simply wrong. There is this thing called the "Equity Risk Premium". Think about it. You can put your money in a safe risk-free investment and get 3.6% (current yield). But, we all know equities carry much more risk. Right, so the difference between the two is the premium you are prepared to accept... the higher risk to put your hard-earned into equities as opposed to govt. bonds (Treasuries or Gilts in UK parlance.)
The ERP varies of course by index with the ERP for the S&P 500 at say 6.4%. So you add the two together: 10%.
You then adjust for the beta (the risk in the stock itself measured against the index in terms of volatility).
This will be the cost of equity. Assuming no debt (so no cost of debt) this is the cost of capital. The cost of capital is the discount rate. The higher the discount rate the lower the NPV, the net present value. The lower the valuation in other words. He is saying that because bond yields went from 1.5% to 3.5% - this lead to the lower valuations. But to completely ignore the ERP from valuations especially for tech companies is baffling to me and isn`t what I learned when I read for the CFA.
(SLP use 15% or so last time I looked - another reason I like the management. They are not aggressive in their financials with daft discount rates like 4% lol. Simon T - what is going on in your thinking??)
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