that is, the price-to-earnings (P/E) ratio (in absolute terms, as well as relative to similar assets, and to its own historical levels) will decline as the share price falls, reflecting investors’ diminishing faith in the earnings power of the company. (Note that the P/E ratio could also increase if earnings actually do decline faster than the share price falls. No one said finance wasn’t confusing.) A few bad trading days, a lousy quarterly earnings report, or a big fund that’s forced to liquidate a position in a hurry can result in a temporary “cheapness” in a stock. If the stock doesn’t have some deeper reason to deserve to be cheap, an efficient market populated by eagle- eyed investors will correct that soon enough. But string a few of those sorts of situations together plus (for example) a general slowdown in the sector, and a stock can become “undervalued.” The discount rises, and the path back to valuation respectability is a bit more challenging.
it happens during a pandemic... more on that below). Oil lamps lingered for a long time before light bulbs found their way into houses... And the disruption of Uber took a few years to unfold. Plenty of people kept their door-stopper rotary phones even as mobile telephones replaced land lines and the idea of a “home phone.” Nuclear power had been under pressure in Germany for decades before the Fukushima disaster accelerated the trend. After the fact, it’s easy to chart an asset’s path to “cheap”... as it devolves to “undervalued”... enters the realm of “contrarian” or “deep value”... and then further regresses to “impaired” and/or “left for dead”... before falling off a cliff to wind up at “stranded.” This journey is easy to explain for stocks, for which there’s a liquid market and readily available comparables (neither of which exists for oil lamp shops or German nuclear power plants). At each stage heading toward stranded, the valuation discount of the asset increases...
American Consequences
American Co s quences
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