I’m a big fan of the market commentaries from Horizon Kinetics. I thought the section below from their first quarter market commentary was a great reminder that target prices and net asset value calculations are directional indicators. I know I’ve sold a stock when it hit my target price … and then watched it keep right on going.
Horizon Kinetics writes a lot of company-specific research reports for institutional investors. Hardly a one has a formal price target. A typical report might frame the valuation something like this; it’s an exercise, really:
– If sales remain stable for the next five years, then Ignored Company would be able to repay $x millions of debt. By reducing interest expense, earnings would increase by $y, and its debt leverage would decline from Ax total assets to 0.Bx total assets.
– Companies of this type with strong balance sheets generally trade at a higher P/E multiple of Gx earnings, in which case Ignored Company shares would produce a 10% annualized return over a 5- year investment horizon.
– However, it is reasonable to expect that sales can increase by 3% per year, as they have been for the past 10 years, without any explicit expansion spending, simply to reflect GDP growth, in which case the rate of return would be 13%.
– Further, Ignored Company might seek to sell its abandoned industrial park on the shore of the Sasquasomething River, an area being redeveloped for residential and retail use. This property contributes no earnings, and is recorded at near zero on the balance sheet, so it is a hidden asset that could add an additional $z per share of value, or Blank% to the annualized return.
That’s a valuation model at work, a framework for how to calculate value under evolving conditions, yet without a price target. A price target would be both unnecessary and misleading.
Horizon Kinetics Q1 2021 Investment Commentary
As time goes on, I find my big winners don’t require a detailed analyst-report style write up. A one-pager that details the base case, the inflection point that will surface value, some fourth-grade math and a summary of my due diligence interviews is more than enough.
