The Return of Value: Why Fundamentals Matter Again
After years of momentum dominance, fundamental analysis is reclaiming its importance in markets. This shift reflects changing market conditions and creates opportunities for disciplined value investors.
The Momentum Era
From 2010 through 2021, momentum investing dominated. Companies with strong growth stories commanded premium valuations regardless of fundamentals. Tesla, at its peak, traded at valuations suggesting decades of perfect execution. Many technology companies traded at 50-100x earnings.
This era created substantial wealth for early investors but also created significant valuation excesses. When growth disappointed or interest rates rose, these valuations compressed sharply.
The Valuation Reset
2022-2024 saw significant valuation compression for high-growth companies. Many that traded at 50x earnings now trade at 20x earnings. This reset has created opportunities for disciplined investors.
Why Fundamentals Matter
Fundamental analysis examines earnings quality, balance sheet strength, cash flow generation, competitive positioning, and management quality. Companies with strong fundamentals tend to outperform over full market cycles.
A company trading at 15x earnings with 15% return on equity is often more attractive than a company trading at 30x earnings with 8% return on equity. The first company is cheaper and more profitable.
Valuation Discipline
Valuation discipline means refusing to pay excessive prices regardless of growth prospects. A company growing 30% annually might be attractive at 20x earnings but not at 50x earnings.
Our framework establishes valuation bands for each investment, ensuring we deploy capital only when prices offer adequate margin of safety. This approach has proven effective in identifying companies that outperform over full market cycles.
Current Environment
Current valuations appear more reasonable than 2021 peaks but still elevated in certain sectors. We maintain disciplined valuation standards, deploying capital only when prices offer compelling risk-reward.