Summary
- This analysis of AmerisourceBergen uses a 10-year time frame and assumes a recession will occur at some point over that period.
- It analyzes expected returns from sentiment reversion to mean, earnings growth, and business returns that weight returns to shareholders more heavily.
- It also explains the factor that I think is most important when dealing with stocks that are currently out of favor or businesses which might be experiencing slower future earnings growth.
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Introduction
Traditionally, most of my analysis on Seeking Alpha has focused on how to avoid losses and how to profit from the price cycles of highly cyclical stocks. When dealing with highly cyclical stocks, it's usually a good idea to evaluate potential returns over a relatively short 5-year time frame because the stock prices can move dramatically over short periods of time. Investing in these types of stocks requires techniques that are different than the standard analysis most investors use to evaluate a stock. There is another group of stocks, however, whose stock prices and earnings fluctuate far less than the classic cyclical stocks I have traditionally written about. While these stocks aren't as cyclical as a "classic cyclical", they are still usually subject to the short-term debt cycle (or business cycle) and to changes in sentiment (which can sometimes also have a cyclical quality about them). More recently, I have been adapting some of the techniques I've used with "classic cyclicals" so that I can apply them to less-cyclical stocks. And today's stock is one of those.
One of the major assumptions that I make for both approaches is that history is the most reliable guide to the future. My experience has been that 80% of the time, even if we looked at nothing else, a stock will behave in a similar manner as it did the previous cycle or two, unless there is a disruption to its core business. For this reason, I don't rely much on predictions of future earnings or sentiment that aren't supported by their existence during past cycles. That doesn't mean that "this time is different" isn't true sometimes. It just means that my analysis isn't counting on this time being much different. That said, if I think a stock is currently a "buy" based on my 10-year, full cycle analysis, before I invest, I will examine the forward-looking trends and narratives more carefully to make sure there aren't major changes in the works that could affect the business.
