On the Importance of Narrative…

Last week I was invited to talk to an undergraduate business class at Riga Business School (thank you Lester Golden!). One of the themes I focused on was the importance of narrative when looking at individual stocks. From my experience, you can perform as many valuations as you like, but no matter how cheap a stock appears to be, it tends to be subservient to its overall narrative. As investors, we are taught to seek out and purchase future profits at a discounted rate, but as humans, we’re suckers for a good story.

Now at this point, I could delve into the importance of mythology and story telling as pertains to the development of human civilization, but I won’t. For now I will simply assert that it serves both investors and corporate executives well to understand just how powerful a thing a story can be. Moreover, when a company stops to communicate its story successfully to current and potential investors, then all bets are off.

One example of an excellent narrative is Tesla. Their CEO is a visionary tech genius who has brought the world electronic vehicles that people actually want to drive. He has even been emulated in Hollywood superhero films (see: ‘Iron Man’). Last week Tesla unveiled its Model III and pre-orders are going through the roof. Now eventually, the narrative will shift to questioning how Tesla will actually manufacture their electric automobile for the masses and what their margins might be, but for now, the sheer excitement of their ambitious plans is overriding any such conjecture.

Tesla’s stock (TSLA US) continues to rip higher:

tsla

On the other hand, Apple’s star has dimmed in the firmament. Apple is once again the most valuable publicly traded company on earth, but in the eyes of the market, something is amiss.

From a valuation perspective, Apple is a no-brainer. On a Price to Earnings basis it trades at a significant discount to most major indices and sub indices:

AAPL PE

Moreover, Apple has over $215 billion in cash and in 2015 generated $82 billion in EBITDA.

So what’s the problem? Let me put is this way: if they were movies, Tesla would be a superhero flick; Apple would be a 1.5 hr trailer where you would laugh, cry, be thrilled, frightened, feel good and in the end would be left wondering what it was that you just saw.

However, it seems as if Apple is starting to get better in the editing room.

Narrative is shifting to monetizing their network of users through things like cloud services and Apple Pay. Their forays into heath technology and luxury products are also beginning to take shape.

And their stock chart has begun to look considerably better too:

AAPL

Apple shares look like they are going to trade up through their 200 day moving average. If they keep on refining and strengthening their narrative, Apple might just be the story of the year.