Over the long run, it is earnings that drive total returns. The multiple can come and go, with sentiment.

AMP, for example, has been driven entirely by the decline in earnings. 1 & 2 are blended forward earnings, R is the total return, and the number (16.23) is the forward PE.

Dominos; the market got very excited (pizza franchise growth to the moon!) leading to material multiple expansion. Eventually something goes awry (it always does, a slowdown in growth, a change in consumer preferences, limits to expansion, whatever it might be) and now, the stocks’ return is fully explained by the earnings growth over the past 7 year. Mind you, in our view 26x is still expensive for a stock of DMP’s quality into a downturn.

Likewise, it is hard not to conclude that the ASX is still expensive, even after de-rating quite a bit. Lots of multiple expansion, minimal growth, in return for some questionable execution. Still on 24x forward with expense uncertainty.

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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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