Qantas' share price has soared over the past week. Does this yield a solid reason to be buying? I don't seem to think so. If you buy a bottle of water for $2 and you come back tomorrow and it's $2.2 is there now more of an incentive to buy the water? Probably not. Higher share prices reduces return, or equivalently, lower share prices increase future returns.
Well, maybe the quality has improved overnight. This may be the case for the bottle of water, but the long-term structural economics of the airline industry suggest otherwise. Focusing on Qantas' ROE over the past 10 years, you can see for yourself that it has declined, markedly. While revenues have only risen by about 20% (over the same period.) This isn't sounding like a great long-term investment to me. Maybe if you dig deeper you may find something which i haven't but with the number of analysts covering a stock like Qantas, chances are probably slim. Yes, they've come out saying that profits next year are meant to do this, or do that, but this shouldn't tempt the intelligent investor who invests on the basis of value over long periods of time. Airlines are a bad investment and this is due to the bad economics of the industry. The only exception i can think of is NetJets (owned by Buffett) but the business model is different.
My point is not to buy into companies solely on basis of price appreciation, you won't win in the long-run by doing so. The most important aspect should be valuation. Many people tend to forget this, including myself at times. You may come across an outstanding business but if you pay a too high price, you can make it a bad investment. So the bottom line is, pay attention to valuation and over the long-term, not the valuation of tomorrow.This is how you will win in the long term (where valuation is a reflection of rigorous analysis.)
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