How many CEO's call their stock price overvalued? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

How many CEO's call their stock price overvalued? 

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In this issue:
» Rural wage growth declines dramatically
» Gold imports continue to surge
» Are there green shoots emerging in the Indian economy?
» Why growth is not a god given?
» ....and more!

The CEO is responsible for the success or failure of the company. The CEOs main duty is in setting strategy and vision. The senior management team can help develop strategy. Investors can approve a business plan. But the CEO ultimately sets the direction.

So how does one identify a good CEO? One thing you want to watch out for is CEOs who complain about their stock price. Just about every CEO would tell that his stock price was too low. But there are very few who complain that their stock price is too high.

As reported by CNN Money, Tesla's (Tesla Motors, Inc. is a California-based company that designs, manufactures and sells electric cars and electric vehicle powertrain components) CEO, Elon Musk has warned that his company's stock price is too high. And investors should be careful and not fall trap to momentum stocks. It's fairly rare that CEOs try to talk down their stocks, given that one of their goals is to boost shareholder value. But if they do, investor's should stand up and take notice. In September 1999, Steve Ballmer, who was then president of Microsoft had warned about the overvaluation of technology stocks at that time. He included Microsoft in that category.

If the CEO is interested in only short term stock price performance of the company, it's not a good sign. This means he is more worried about what the stock market says about his stock price as opposed to worrying about the state of the business. Most of the incentives of CEO's are tied to the stock performance of the company. So it suits them to focus on short term price increase. But while that's good for him, it's going to be bad for the company. Short-term decision-making is usually harmful to long-term returns. Ultimately, it will send the stock price lower.

Although there are some honest CEO's, most of them are worried about short term price performance, rather than long term shareholder wealth creation. Some of them try to hide the bad performance by fudging numbers, using technical jargons and fancy languages.

This is the reason why we pay careful attention to the quality of a company's management. A management that is honest and has sound corporate governance is more likely to protect the interests of minority shareholders. So look for companies with solid long term fundamentals and management integrity. This has often been the recipe for excellent long term wealth creation.

In your opinion which CEO's in India are honest and would admit if their stock price was overvalued? Let us know your comments or post them on our Facebook page / Google+ page

01:12  Chart of the day
The benchmark Indian stock indices may be close to their all-time highs. But the ground realities of the Indian economy are in stark contrast. The economy has been slowing down over the last couple of years. Those who think this is just a temporary blip and that the economy will regain growth momentum soon may be proved wrong. One of the critical drivers of an economic recovery is capital investments. It seems both domestic and foreign investments are drying up.

Consider foreign direct investment (FDI). As per an article in Zee News, FDI inflows in August 2013 stood at a mere US$ 1.4 bn. This is 38% lower on a year-on-year basis. During the April-August period of FY14, FDI (foreign direct investment) stood at US$ 6.46 bn, just marginally higher by 3.7% year-on-year. This just highlights the poor business environment in the country. Even despite the much-hyped economic reforms by the government, foreign investors still don't seem to be confident about India.

FDI continues to decline
Source: Reserve Bank of India

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Over the past few years one of the factors on which the consumption story in India was based was rising rural wages. As rural wages were on an uptrend, there was a growth in demand from the rural side. There were several explanations for the growth in wages. This included the rural employment guarantee schemes; lower migration of rural workers to urban areas; indexing of wages to the consumer inflation index. However the tale seems to have taken a twist. As reported by The Mint, a research carried out by broking house Nomura reveals that the real growth rate has actually turned negative. In fact the growth rate in rural wages has been dipping over the past 1 year and has finally dipped into the negative zone. But while growth in wages seems to have cooled off, demand has not been impacted to the same extent. This is evident in the persistently high levels of inflation particularly the food inflation. Whether the cool off in wage growth would lead to a cool of demand and consequently in inflation, is anybody's guess. But it certainly does provide fodder for thought for the RBI Governor when he sits down to finalise the monetary policy later this week.

If the prized PSUs are not fetching premium on the stock markets, the government has less to worry. For there is yet another asset class that is offering some relief to the government's disinvestment woes. Readers may recall that the government's clamp down on gold import had led to a surge in gold smuggling. As per Economic Times, smuggled gold seizures have risen 500% YoY in the past 6 months. Even then, rough estimates suggest that only 5 to 10% of smuggled gold is seized. The rest manages to get in unnoticed. So the government now plans to use the gold booty its advantage. The seizures will add to the government's coffers at a time when every paisa counts. As the disinvestment proceeds have hardly helped the government bridge deficits, auctioning the seized gold will come handy. In fact, this year itself, the government plans to auction gold worth Rs 1 bn through the State Bank of India. It is time the government realizes that such faulty policies are not going to take it too far.

The Indian economy has been gripped by a slowdown for quite some time now. In fact, the scenario considerably worsened in the months of August and September as the rupee slid sharply and companies reported poor first quarter numbers. So are we set to see the situation worsen further? Or has the economy bottomed out with a recovery just around the corner? The consensus seems to point towards a recovery although a gradual one. For instance, as reported in an article in the Economic Times, credit growth has picked up and exports have grown in double digits in the last three months. Plus, industrial production has managed to stay in the positive. The biggest hopes are on monsoons which were good this season. This should fuel growth in the rural regions and bolster demand. The government too seems to be giving a push to infra projects most notably in the power sector. But there are challenges as well. This is in terms of inflation and the strained finances of the government. Overall, it does seem likely that green shoots are beginning to emerge in the Indian economy. Recovery most probably will be a slow and steady one. And it does seem that 2014 could turn out to be a better year than the current one.

Confidence can really be a double edged sword. On one hand, it can really get us all mentally charged to face the uncertainty that the future might bring up. However, take your confidence too far and it can lull you into a false sense of security. Well, no points for guessing which of the two attributes did our policymakers display while handling India's economy. As India's former Chief Economic Advisor Mr Arvind Virmani mentions in a recent web summit with us, policymakers made the mistake of assuming India's growth is God given. And this led to all the social schemes and entitlements that we are now finding so hard to manage. In other words, we took our costs so high that when the revenues failed to match up, it left a huge hole in our finances.

We can't help but agree with Mr Virmani. What we needed to take us to the next level of growth were large scale reforms. But the same got masked by cheap liquidity flowing in from the west. However with liquidity no longer being as abundant and with policymakers doling out even more freebies, its ill effects on the economy is for everyone to see. Thus, what we urgently need are policy actions that are holding back growth. And at the same time a rollback of subsidies and entitlements that are proving to be a huge wastage of resources.

Meanwhile, after a positive start, the Indian stock markets have slipped into the red. At the time of writing, the benchmark BSE-Sensex was down by 85 points (0.4%). Stocks from the FMCG and realty sectors were the leading losers, while those from the capital goods and oil and gas space were amongst the top gainers. Major Asian equity markets were trading in the green led by Japan (up 2.2%) and Taiwan (up 0.8%). The European markets have opened on a mixed note.

04:55  Today's investing mantra
"In the long run, a portfolio of well chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won't outperform the money left under the mattress." - Peter Lynch
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3 Responses to "How many CEO's call their stock price overvalued?"

Partha Sarkar

Oct 29, 2013

Excecellent explanation fundamentaly.



Oct 28, 2013

It is other way, most CEO particularly Promoter complain that market is undervaluing their company stock, market does not understand enough their company, etc.



Oct 28, 2013

Good examples of Foreign companies,but vary difficult to find in Our Country.

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