Stock market investing can be very rewarding if done right, but consistent investment returns require a correct assessment of the long-term prospects of the companies one invests in.
This can however be a challenging task in a market like Qatar which is a relatively young economy and has a very large investment budget for the next several years in the run up to 2022. Yet the prospects in particular for the non-energy economy after 2022 are relatively unknown.
When investing in a stock, we are effectively investing in the present value of the company's entire future stream of earnings. Hence, if a company will be making materially different profits after the next eight years, its value will be quite different from that of another company which will not experience such a fundamental change in the attractiveness of the industry it operates in.
This makes valuing a company using P/E a misleading effort. In a normal growth market/industry, P/E could be a useful benchmark, but when earnings are expected to change rapidly, this could be very misleading.
The main purpose of this report is to share with our investors our thinking on the future prospects of companies and the kind of analysis we conduct when selecting stocks for client portfolios.
From the perspective of their profitability outlook, Qatari stocks can be grouped into four categories:
While eight years seems long enough, those who are familiar with net present value (NPV) calculations will know that it does make up a significant portion of a company's value. Further, the NPV impact of post-2022 earnings becomes more important with each passing year. We believe the equity market could start pricing this within the next 3-4 years.
To give an example, a company with very good earnings prospects for the next 8 years, but less than half of prior year earnings will be valued at around 50% discount to a company with stable earnings prospects.
While many investors believe short term earnings are more important to stock valuation, our extensive back-testing guides us to focus on long term earnings as the key driver of stock returns in the long term.
In our investment research for stock selection, we regularly review our forecasts for each company's future profitability and select those that offer the best upside, taking into account their earnings prospects up to and beyond 2022.