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Quality company valuations are getting stretched

Phil Oakley says finding quality companies whose valuation has not run away with itself is becoming increasingly difficult
August 21, 2020

Finding quality companies at a decent valuation is becoming increasingly difficult as investors have bid such companies up to arguably dangerously high levels due to the paucity of alternative options for their money. The problem is that, with major economies around the world struggling to right themselves following the covid-related shutdowns, such valuations are beginning to look very full and the downside risks are high. Against this backdrop, finding fresh candidates for either portfolio is becoming increasingly difficult. 

Equity markets continue to thrive, especially over the pond where the tech-fueled recovery from March's bear market saw new record highs across many indices this week and Apple become the first $2trn company. Apple is a classic case in point of a company whose share price growth has massively outstripped the admittedly solid performance of the operating business. This has left the valuation on the outer edges of reality for a company whose net income has risen 7 per cent since 2015 but whose valuation has trebled in the same time. With investors lacking healthy alternative options it is likely that we could see the shares of quality company bid up even further but the gut feeling is that gravity will kick in at some point as the economic reality of the covid lockdown fallout becomes ever clearer. 

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