“Unit Price” in Wealth Management | The Price-to-Product Ratio

unit priceBy John Montag, President, Chief Investment Officer, & Portfolio Manager

Assume you habitually consume soda (in Atlanta this is likely a red can…) or another beverage of choice, picking up a six-pack weekly at the grocery market.  Historically you have paid a unit price of $3.00 for the pack, or $.50 per can.   

This measurement has become a standard for you, as each week you see this price, divide $3 by 6 cans, and know you are paying a “reasonable” price.  Further, every now and then the price drops to $2.40 for that same six-pack.  As an astute consumer, you quickly realize the sale- now $.40 per can- but never really focus on “why” this sale occurs.  

Perhaps the grocery received too much soda from the distributor?  Alternatively, maybe the market needs the shelf space for a different item.  Whatever the reason, you are the beneficiary, paying less than normal and feeling satisfied purchasing a good quality product at a cheaper price.

One week you enter the store to see the price has increased, not by a little, but by a lot.  That same six-pack that was $3 last week is now $6 or, as you quickly calculate, $1 per can. Inflation, indeed!

Having a few extra cans at home, you skip the purchase this week and assume the price will drop in the coming days.  You predict accurately and the next week find the price at $4.50 or $.75 per can.  Now you begin to wonder “why? and “how long will this last?”  Again, the reasons are not clear, but you have ideas.  Perhaps the grocery did not receive its regular shipment?  Alternatively, maybe the cost of gas has affected the price of getting the product to the store.

This situation is a good illustration of how stock market investors study the product we purchase: the future earnings of companies. 

As buyers, we approach the market each day looking for top-quality earnings, sold in the form of a share of a stock or fund.  That product has the same three features detailed in the scenario above:

The Unit Price

First, there is the price. Similar to your purchase in the grocery store, we can either purchase the item at the price that is given or walk away, but we have little room for negotiation. We are “price takers” – dependent upon the market and broader forces who set the price.

The Product

In our case, the product is “company earnings” – the profit, or the amount a company keeps after selling the product and paying the necessary expenses.  For example, if it costs more to make the soda than sell the soda, a company would have “negative earnings” and likely not survive too long. 

The Price-per-Unit Ratio

Here is where the comparison becomes more tricky as the product comparison wanes. While a can of soda is standard from one week to the next (the same type and quantity of soda inside its standard branded packaging), the earnings can have differences week-to-week, though that conversation is for another day.   

 

The key point is the underlying analysis of the unit price relative to the product. This is done day in and day out with the goal of knowing when to take action: purchasing or selling the stock.

Developing an instinct around the price per unit and the true “value” of a stock or fund can take years of analysis and experience to quickly assess and decide on actions.  These judgments and the experience required to make them are why MONTAG has always relied on hiring industry veterans to represent our discerning client base. 

 

At MONTAG, we do things differently. We‘ve been a family-run business for nearly 40 years, and we still believe that our clients are best served by treating them as part of that family. We take the time to get to know you – what you’ve done to build your net worth, your investment philosophy, your financial questions and fears, and above all, your financial hopes. 

Every single client has their own unique story – a story that deserves more than a conversation with an anonymous voice. Contact our Business Development team today by calling 404.522.5774 or emailing [email protected] to get in touch.