Value Column von Hans Peter Schupp

13 MAY 2024

The stock market – a casino without a zero?

Hans Peter Schupp, Managing partner at Fidecum AG and portfolio manager of the Contrarian Value Euroland Fund, about prudent stock selection

Valuations on the stock market sometimes get out of hand. For example, Scott McNealy, who was CEO of Sun Microsystems from 1984 to 2006, tweeted in 2002: “2 years ago we sold at 10x sales when we were at 64 dollars. At 10x sales, I have to pay you 100 percent of sales as dividends every year to give you a 10-year payback. … That assumes zero costs, which is really difficult with 39,000 employees. … And that assumes that I have no research and development costs in the next 10 years to maintain the current turnover. … Do you realize how ridiculous these basic assumptions are?” And today? NVIDIA is currently valued at 30 times its revenue. In the end, however, NVIDIA could end up like Cisco in the noughties.

Is there infinite growth? No!

Cisco was the most valuable company in the world 25 years ago and was valued similarly to NVIDIA today. At the time, Cisco was a leader in the booming Internet infrastructure and networking technology market. The company was known for its high-quality products and solutions, which were used by many large companies and Internet service providers. As a result, investors concluded: “Cisco stands for endless growth”.

However, competition in the technology industry intensified as new companies entered the market and challenged established companies like Cisco. This led to pressure on margins and made it more difficult for Cisco to meet earnings expectations.

Cisco is still a great company today, but no longer has any unique selling points that set the company or its product apart from the competition. Investors who invested in the boom at prices of over 60 US dollars in 2000 are still waiting for their historic purchase prices today – despite good share price performance over the last 10 years.

Of course it is fun and successful to invest in trending stocks like NVIDIIA. And for those who see the stock market as a casino without zero, “The trend is your friend” naturally applies. With this attitude and with stop-loss prices, it also makes sense to speculate in these shares.

Our premise: Invest, don’t speculate

However, we take a different approach. The original idea of the investment was to support a lucrative business idea with debt or equity capital. This capital injection was documented, or as we say today, securitized. And this has a long tradition.

Back in the 13th century, many owners of such documents came together In the inn of the Van der Beurse family in Bruges, and the idea of trading those among themselves was initiated. However, this also changed the valuation of these documents. The value of the share or promissory bill took center stage and no longer that of the original investment.

 Utopian assessments

This may explain the valuation of NVIDIA today, or the valuation of Cisco back then. Network technology was scarce in 1999 and semiconductor manufacturing is scarce today. Many investors want to benefit from this and struggle for shares of those companies, regardless of the real earnings prospects. The prices paid today are often crazy.

However, this makes little sense for us and is out of the question for our Contrarian Value Euroland Fund. We do not speculate, we invest. With our investment approach, which has been tried and tested for more than 25 years, we look for undervalued companies with understandable business potential. We invest like an entrepreneur looking for opportunities, even if this means going against the prevailing market trend. This enables us to achieve above-average performance for our investors in the long term.

NVIDIA currently has a P/E ratio of over 70, which is simply far too high a risk for us to invest. From our point of view, this is a similarly utopian valuation to that of Cisco. With an average P/E ratio of around 6.5 in the Contrarian Value Fund, our investors are much more relaxed. We leave the pure thrills to others.

Translation for convenience only!

About the author: Hans Peter Schupp is a managing partner of Fidecum AG und the portfolio manager of the Contrarian Value Euroland Fund.