Dear Smart Investor,
Here’s a short quiz for you: which business would you prefer to own?
Company A recently reported a 9% year on year revenue growth for its first quarter and is trading at 30 times its trailing free cash flow.
Company B’s revenue grew by 12% year on year for its latest quarter. Shares are changing hands at around 22 times its trailing free cash flow.
The answer can be obvious.
With all things being equal, Company B wins on both counts: its topline is growing a third faster, while its shares are almost a third cheaper.
Yet, businesses are rarely treated equally in the stock market.
Swinging to the extremes
The companies above aren’t fictitious.
Company B is Zoom Video Communications (NASDAQ: ZM), the poster child of the pandemic.
Shares have been hammered over the past 12 months.
Company A refers to Pepsi (NYSE: PEP), the food and beverage giant, whose shares have experienced a resurgence over the past year....