Aswath Damodaran, finance professor at NYU Stern School of Business, discusses the value in this market. Bullet Points:
- Current valuation seems favorable (depending on the quality of EPS estimates); he likes tech and China related.
- NVDA: he bought it at $145 and still under water.
- BA looks good.
- GE is an easy pick (so beaten up that management can chew gum and walk at the same time).
Aswath Damodaran On The Value In This Market, NVDA, BA, & GE
Q3 hedge fund letters, conference, scoops etc
Transcript
CNBC: If you are wondering where to find value in today's market there's no better person to point you in the right direction than the Dean of valuation. Aswath Damodaran is a finance professor at NYU Stern School of Business. He joins us now from San Diego. Ocelots great to see you. We've been having a beer fierce debate on this desk in terms of Nvidia I know that's an area that you like but overall in the markets what sort of valuation metrics do you use the somebody to come out and say these have been compressed for PCs have been compressed. What do you look at.
Damodaran: I look at that I look at a forward looking number of the equity risk. Basically back from stock prices and cash flows what investors are expecting to make at the end of 2008 that number was close to 6 percent. There would be three years from the last 55. Well you've had a higher number one was in 1979. The other was the end of 2008 and the third was in 2011. If you look at the cash flows and the level of interest rates stays stocks no more likely to be undervalued than overvalued. That said though I think the big concern for the coming year is going to be expected growth to the earnings reports for the next two quarters are going to be key in whether stocks can sustain themselves. I think if we can go through the first two quarters without major shocks to earnings I think the market is poised to recover.
CNBC: So basically even though the market seems according to these metrics like the market is undervalued are more likely to be undervalued than overvalued are fairly valued. It's still a wait and see market for the first half of the year.
Damodaran: Because I think growth has come down substantially I mean expectations have come down so much over the last year the question is whether we've adjusted enough whether there's more to go. There might be more shocks along the way that bring growth on even further. But at the moment given what people are expecting and even in terms of lower growth I'd be more likely to buy stocks and sell them.
CNBC: Okay. The tiebreaker on our debate on Nvidia and whether or not its value in this market. And it doesn't have to be a comment on this individual stock but I know that you like tech stocks in general and see value there.
Damodaran: I did buy Nvidia at the end of last year because it's a stock that's been on my radar for a long time but did the prices that was trading at my limit buy came in at 145. I'm still waiting to get back to 145 I might never get there but I like the company. I mean I think there is a real chance that growth could drop off next year. But I think long term I would say to buy the growth in that stock at the prices that you get for today. I also like Boeing. I mean I think it's it's a stock that got punished for all the wrong reasons have been when the China. Problems popped up but you know let's face it you could substitute for Apple you could easily substitute for Boeing. So I don't think you can tar all these companies which have China exposure with the same brush.
CNBC: So the two broad categories of value in this market in Europe you Aspas are enough tech stocks in companies exposed to China. And what really caught my attention is that you even like General Electric which is sort of I mean as China exposure but it's also a story in and of itself in terms of being a turnaround story.
Damodaran: GE is been so beaten up that at this stage if the management can chew gum and walk at the same time people are going to think they're geniuses so I think that's a stock that I'm buying because people just don't expect to do much but I think it still has some solid businesses that if it plays its cards right I think you could see a significant recovery in the stock a professor. Is it cheap. Is there value there. I've tried to make the argument that there's no some of the parts argument. So is that what you want to do or do you just think it's about chewing gum and walking. I think in a sense the quality the management is and how easily they can disentangle the parts on some of the parts basis looks undervalued. But it's very difficult to break up the pods because they're all connected to each other. You need a pretty solid men solid management team to be able to separate the pods and to be able to get the best prices you can for each part that is going to be the test for management is whether they can do that. This is not a turnaround story. This is a story of disentangling the company and selling off its pieces for the best prices they can get.
CNBC: Professor, thanks so much for joining us. Always a pleasure speaking with you. Aswath Damodaran of NYU. Next time if I see Larry call I'll see if he can walk.
