Is The Increase In Volatility Signaling A Dangerous Market Environment?

Also, GAAP (diluted) earnings for 2015 clearly indicate that CBI’s price drop was rational based on this fundamental metric. Consequently, the threat of a value trap based on this metric would be sprung just as it was when I evaluated cash flows above. Additionally, we also see that fundamentals drive stock prices over the long run.

The following GAAP reconciliation from CBI’s 2015 annual report reflects the reason for the 2015 diluted earnings loss. The point being that focusing on fundamentals, all fundamentals, provides more insight than simply looking at stock price movements.

The moral of the story is that a value trap can be avoided by focusing first and foremost on fundamentals. Chicago Bridge & Iron Company N.V. (NYSE:CBI) has at times been an excellent total return investment. However, the company also has experienced a significant amount of cyclicality within its operating results historically. Although this is reflected in the company’s long-term price action, a true understanding and perspective comes from focusing on fundamentals more than price.

Summary And Conclusions

Excessive stock price volatility within the overall markets would suggest a level of anxiety with investors. However, anxiety is an emotional response and emotional responses tend to be temporary. Nevertheless, if all you focus on is short-term price action, you can be easily led astray. Personally, I prefer focusing on the fundamental strengths and weaknesses of each individual company I am interested in investing in.

Consequently, I am not really as interested in whether the price of the stock is rising or falling as I am in how the current price relates to the fundamental value of the business.  I never let the short-term direction of stock prices cloud my judgment. Instead, I base my decisions on what I believe the company under consideration is capable of achieving on an operating basis going forward.  If valuation appears sound on that basis, I am happy to invest.  If valuation appears rich, I will avoid or possibly sell if I already hold the stock. Consequently, I rarely see danger in price volatility, but sometimes I see it clearly when I examine fundamentals closely.

Disclosure: Long CBI, CVS at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Note: This article is written by Chuck Carnevale and was originally published at FASTgraphs.com.