What Matters More, People or Price?
Alec is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Let me start by saying that there are many ways to value a company. When people ask themselves whether they want to invest in a company, many factors come into play. Some will focus on “intrinsic value,” while others will focus on how fast earnings are growing. For me, it is a combination of several factors.
First, I have to understand the company. Companies like Netflix (NASDAQ: NFLX) I can easily understand: The company provides TV and movies through its web streaming and DVD mail delivery services. It is simple, easy to understand, and to be honest I could probably explain it to an eight-year-old. In addition, the business plan is simple and expanding the company does not require anything special. All Netflix has to do is get more members (although that is a lot easier said than done, the principle is easy, and that is the important thing).
Second, the people running the company have to be extraordinary. The perfect example of this is Apple (NASDAQ: AAPL), when they fired Steve Jobs. After his departure, the company started to sink, because the people running the show did not have what Steve had, his vision. After Jobs and his vision returned to Apple, well, the rest is history.
With servant leaders at the helm, their vision for the future will motivate the company towards greatness. I know it sounds cheesy, but the principle is not. CEOs like Reed Hastings of Netflix and Tim Cook of Apple both have a vision of a better tomorrow, by providing great products and making the world a better place to live in.
To me, the CEO is the most important part of the puzzle, because he or she is the leader of the company. John Mackey of Whole Foods (NASDAQ: WFM) said in his Annual Letter to shareholders “We are more passionate than ever about our future and the positive impact we can make in the world by helping the natural and organic foods industry grow and succeed, [and by] educating our customers about healthier lifestyles.” That statement tells me that Mackey is not in it to make money; he is in it to make a “positive impact on the world” and to help people live better. That vision is the most important thing a company can have because it is what inspires the entire company. People stocking the shelves at Whole Foods probably do not know John Mackey, but they believe in him, and they believe their jobs have a purpose, (at least I like to think so).
Now flipping to the other side of the coin, the stock price is also very important. Right now Netflix is trading with a PE ratio of 214. That is 214 years of earnings it would take to get your money back, provided earnings remained the same! Whole Foods is trading with a PE ratio of 38, still high, but doable.
My point is that in addition to having a rock solid understanding of the company and belief of the management team and their vision, the price of the stock must also be within reason. Wall Street controls a majority of the positions in the stock market and they decide the prices. With that being said, when the hedge funds sell and the stock reaches a low (like Apple at $450), that is the time to buy. The faith in the vision and management of the company is enough to justify the low price because they will steer the company towards growth.
So what does matter more, the people or the price? Both are important, but as Warren Buffett says, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Thank you for reading.
aleceiber has no position in any stocks mentioned. The Motley Fool recommends Apple, Netflix, and Whole Foods Market. The Motley Fool owns shares of Apple, Netflix, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!