[Cambridge, Massachusetts, June 6/22/2020 — ] Jacob Khan has speculated a decline in topline growth for most of the companies in the S&P 500, and these companies are facing an increase COGS & SGNA due to significant supply chain disruptions. Both of these two factors are not great for free cash flow, which are the main drivers of corporate valuations. Khan also notes that the CPI (Consumer Price Index) has also not increased; therefore, it is obvious that retained earnings for most companies will be down.
At the present moment, the market has not factored these underlying conditions efficiently, evident by valuations still being high. The S & P 500 trades at 22 times earnings.
These higher multiples are based on pre-COVID-19 earnings, and given the margin reduction due to supply chain disruption and overall loss of topline revenue, investors will be shocked once Q3 and Q4 earnings get disclosed.
Finally, on July 25th and Nov 7th, GDP numbers will be coming out, and Jacob Khan will be keeping a close eye on the numbers. The GDP growth number has a significant impact on the terminal value of every company. Typically terminal value represents over half of the intrinsic value of the stock price in traditional Discounted Cash Flow Models. Therefore the GDP growth rate will have a significant effect on stock prices.
The GDP numbers will also be helpful in gaging the outlook of our economy in the coming years. 2/3rd of GDP is consumer spending, so the data will give us more information on how well to gage revenues for public companies.
Jacob Khan is an A.L.B. Candidate at Harvard University studying Business Administration & Management in Extension Studies class of 2021. Jacob has an interest in leadership and management and is spending his summer interning at a search fund as a Private Equity Analyst. During the regular semester, Jacob Khan works as an Equity Research Analyst at Harvard Business School for an MBA Professor of Finance. Last semester Jacob was a Senior Investment Research Analyst at the Harvard Financial Analyst Club.
(Jacob Khan at Baker Library, Harvard Business School 2019)
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This is not investment advice, and Jacob Khan does not assume any liability.