Here’s what you need to know today

• America’s Federal Reserve cut interest rates 50 basis points, from between a target of 5.25%-5.5% to a target of 4.75%-5%. As we talk about on today’s Equity Mates podcast, Australia is now out of sync as most of the rest of the world start to cut rates (Apple | Spotify).
  
  

• Australia’s Federal Opposition is once again pushing their Super-for-Housing policy that would allow Australians to withdraw their superannuation to purchase housing. This is despite even more analysis suggesting that the policy would advantage older Australians over young people trying to get into the housing market and would further inflate an over-inflated housing market.
  
  

• More bad news for BHP. After first shutting down Western Australian nickel operations because of a falling nickel price, it then faced into a falling iron ore price as demand from Chinese steel mills fell. Now, it is facing into a falling potash market. Prices are down 13% year-to-date and expected to fall further.
  
  

• Facing growing criticism about its impact on children’s mental health, Instagram has announced new teenagers accounts. This won’t be enough to slow down the Australian government plan to put a minimum age restriction on the social media platform.
  
  

• Tupperware Brands, the company synonymous with food-safe plastic containers, has filed for bankruptcy. The iconic brand simply couldn’t compete with the number of competitors in the market and had been suffering years of declining sales.
  
  

• Australia’s Reserve Bank has confirmed it will continue to work on a Central Bank Digital Currency, however not a public-facing one. Instead, it sees a more practical use case in transactions with Australia’s commercial banks.

What the…?

Snapchat’s new feature, MySelfie, comes with a twist. While the AI feature allows you to generate selfies, the platform’s updated terms and conditions allows Snap to use your face in “personalised sponsored content and ads”. Meaning, in theory, advertisers on Snap could start personalising their ads with the user’s own images.

Investing is a lifelong journey

Here’s what you can learn today.

This is an excerpt from our conversation with Kyle Macintyre, listen on the Equity Mates Investing podcast (Apple | Spotify)

Question: Beginner investors often hear that every company has a price, but they wonder what makes up that price. Experts say it's the present value of future cash flows. How do you determine the right price for a company? Is it based on discounted cash flow, or is it something else?

For me, one of the most practical measures of price is the price-to-earnings (P/E) ratio. This ratio essentially asks how many years' worth of earnings you are willing to pay today for those future earnings. For example, historically, Qantas has traded at a P/E ratio of around nine, meaning it would take nine years to recoup your investment based on the company's earnings.

While the P/E ratio is a practical tool, there are various valuation methods available. You can use a price-to-sales ratio, which compares the company's price to its revenue. There’s also discounted cash flow valuation, where you model earnings over a certain period, typically ten years, and assign a terminal value based on growth and discount rates. 

Valuation approaches vary from one company to another. High-quality businesses with strong earnings growth typically command higher P/E ratios. For instance, the average stock on the ASX 200 trades between 16 to 20 times the P/E ratio. Strong performers like Seek or Xero will have even higher ratios. Conversely, cyclical or value businesses like Qantas, which historically trades at around nine times, reflect more volatility in earnings. 

Ultimately, different companies require different methodologies, and it’s essential to choose one that aligns with the specific company and your investing comfort level. For new investors, the P/E ratio is a great starting point. Comparing a company's P/E to the broader market can provide insight into whether it’s undervalued or overvalued historically. For example, insurers typically trade at about a 25 percent discount to the market's P/E multiple. If you identify a company trading below its historical valuation, that can signal a potential investment opportunity worth further investigation to see if it’s a broken story or a hidden gem.

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