Engtex – chasing dreams or using base rates?
Daniel Kahneman made famous the concept of the base rate fallacy. When presented with both historical or statistical information and those which is specific to an event, we tend to ignore the historical/statistical one.
I worry that we are going to see this play out for Engtex. This is a cyclical company whose performance is linked to steel prices. So in valuing Engtex we should be looking at its performance over the steel cycle. On such a basis its earnings value based on its historical performance is below its market price suggesting that it is overpriced
Of course, you would argue that this is backward looking and a more forward looking picture should consider the potential demand for water pipes. This in turn relates to the increase in water rates that would translate into better earnings for the water companies that in turn spur more water infra spending. On such a basis, you would consider Engtex as being underpriced.
In the short term the water infra story may play out. But if you are a long-term fundamental investor, shouldn’t you be looking at the water infra story in the context of the base rates?
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