In consecutive days, market darlings, United Group and JB Hi Fi have “disappointed” investors with profit increases of 46 percent and 49 percent respectively. United scrip, which had traded as high as $21.87 last November has dropped back to around $12.00, while JB Hi Fi has slipped from around $16.00 per share last July to close at $11.59 yesterday.

United boss, Richard Leupen, has been rightfully lauded for the strong performance of the group, with the services group rising six-fold since 2002. Similarly, JB boss, former Macquarie Direct Investment executive, Richard Uechtritz, deserves much credit for steering JB Hi Fi from its float price of $1.55.

However, one thing that Leupen and Uechtritz may be guilty of is failing to dampen investor over-enthusiasm regarding their respective share prices. The problem certainly isn’t confined to Leupen and Uechtritz – most Australian CEOs believe that it is their job to boost the share price, regardless of whether this results in investors becoming overly optimistic regarding future earnings. Leupen and Uechtritz must have known that investor expectations were getting ahead of profit growth, but didn’t make manage investors’ expectations accordingly.

Legendary investor and CEO, Warren Buffett, holds a different view. Rather than encouraging an ever-rising Berkshire Hathaway stock price, Buffett notes in the Berkshire Owners manual that:

To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that holding period.

For this to come about, the relationship between the intrinsic value and the market price of a Berkshire share would need to remain constant, and by our preferences at 1-to-1. As that implies, we would rather see Berkshire’s stock price at a fair level than a high level…by our policies and communications, we can encourage informed, rational behavior by owners that, in turn, will tend to produce a stock price that is also rational. Our it’s-as-bad-to-be- overvalued-as-to-be-undervalued approach may disappoint some shareholders. We believe, however, that it affords Berkshire the best prospect of attracting long-term investors who seek to profit from the progress of the company rather than from the investment mistakes of their partners.

JB Hi Fi and United have been two of the market’s best performers over the past five years – competing and succeeding in extremely competitive sectors. However, both companies have allowed investor expectations to exceed forecast performance (even after the recent slump, JB Hi-Fi is trading on an earnings multiple of around 30).

Sadly, United’s Leupen is now known as the CEO of a company which has seen its share price almost halve in the past six months, instead of the CEO who has delivered share price growth of more than 600 percent.

Peter Fray

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