Normalise the underlying conditions when “rating” a company’s share price 

Normalise the underlying conditions when “rating” a company’s share price 

I have often thought it is better to have qualifications in psychology rather than accounting, finance, or economics when it comes to being a successful, patient investor.  

Four years ago, on 11 March 2020, the World Health Organisation (WHO) officially declared the COVID-19 outbreak a pandemic. Markets were smashed in a short time, with many indexes declining 30 to 40 per cent over February/ March 2020. In hindsight, opportunities became plentiful, however the ensuing “pandemic-related enthusiasm” was often misplaced. Hence, it is crucial to discern between a fad and something more permanent.  

In this blog, I wanted to compare the share price of four companies – as at 11 March 2020 – the time of the WHO “pandemic” announcement, with the share price and date of the record high, and with the share prices at the end of February.. 

By analysing these share price movements, I have tried to illustrate that when the market becomes exceptionally enthusiastic, a sober assessment is required. Further, I have tried to illustrate what happens to share prices when the conditions surrounding the COVID-19 enthusiasm start to dissipate.  

• Moderna (NASDAQ:MRNA) is a U.S.$37 billion market capitalisation pharmaceutical and biotechnology company that focuses on RNA (ribonucleic acid) therapeutics, primarily MRNA vaccines, and became well known for its Moderna COVID-19 vaccine. Over the period under review, its share price has moved from U.S.$23.61 to $484.87 (9 August 2021) to $97.48 (-80 per cent from the record high). 
• DocuSign (NASDAQ:DOCU) has a $10.8 market capitalisation that allows organisations to manage electronic agreements with electronic signatures on different devices. Its share price moved from U.S.$75.00 to $310.05 (3 September 2021) to U.S.$52.77 (-83 per cent). 
• Zoom Video Communications (NASDAQ:ZM) has a U.S.$21.2 billion market capitalisation and focuses on communications technology. Its share price moved from U.S.$110.30 to U.S.$568.34 (19 October 2020) to U.S.$69.62 (-88 per cent) 
• Peloton Interactive (NASDAQ:PTON) has a market capitalisation of U.S.$1.7 billion, and its offering includes stationary bicycles, treadmills and indoor rowers equipped with internet-connected touch screens that stream live and on-demand classes through a subscription service. Its share price moved from U.S.$22.00 to $167.42 (13 January 2021) to U.S.$4.64 (-97 per cent). 

To summarise, the share price factor gains varied between 20.5X (Moderna) to 4.1X (DocuSign), whilst the range of the share price decline (from their record high) was 80 per cent (Moderna) to 97 per cent (Peloton). Discerning between a fad and something more permanent is crucial. 

MORE BY DavidINVEST WITH MONTGOMERY

Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.