By: Chuck Carnevale
Co-Founder of FAST Graphs
A.K.A. Mr. Valuation
Chuck Carnevale, co-founder of FAST Graphs, aka Mr. Valuation explains what he believes is the single biggest and most avoidable risk investors face: overvaluation. Drawing on more than five decades of experience, Chuck shows that while markets fluctuate for many reasons, consistently overpaying for stocks is the most common cause of disappointing long-term results.
In this video, Chuck will cover Align Technology (ALGN), American Tower Corp (AMT), AmericanWater Works (AWK), Brown Foreman Corp (BF.B), Charles River LaboratoriesInternational (CRL), Epam Systems (EPAM), Eversource Energy (ES), FactSetResearch Systems (FDS), Global Payments (GPN), Hormel Foods Corp (HRL), IntuitInc (INTU), Realty Income Corp (O), PepsiCo Inc (PEP), PayPal Holdings (PYPL), TeleflexInc (TFX), FMC Corp (FMC), Stanley Black & Decker (SWK), Pitney Bowes (PBI)
Chuck begins by noting that the market has experienced one of the longest bull runs in history since the 2008–2009 recession. Long bull markets often create investor complacency, where rising prices make many investors feel “smart,” even when valuations become disconnected from underlying fundamentals. History shows that bull markets always end, and when prices revert to reality, overvalued stocks are the most vulnerable.
Using FAST Graphs, Chuck demonstrates how stock prices ultimately track earnings over time. He explains how fair value is determined using earnings growth rates and price-to-earnings (P/E) ratios, and why stocks trading far above their earnings-justified valuation expose investors to unnecessary risk. Through numerous real-world examples, including growth stocks, REITs, utilities, consumer brands, and technology companies, he shows how even strong businesses can produce poor or negative returns when purchased at excessive valuations.
A recurring theme is earnings yield, which represents the return an investor can reasonably expect from the business itself. When valuations rise too high, earnings yields become extremely low, making it mathematically difficult to achieve attractive long-term returns, regardless of how good the company is. In many cases, investors who bought great companies at inflated prices experienced years of “dead money,” earning little more than dividends while their principal stagnated or declined.
Chuck also addresses investor psychology. Rapid price increases often attract buyers at the worst possible time, while temporary price declines scare investors into selling, even when the underlying business remains strong. He emphasizes that emotions drive prices in the short run, but fundamentals drive prices in the long run.
While valuation risk is the primary focus, Chuck acknowledges that fundamental deterioration is another legitimate risk. Companies whose earnings collapse due to real business problems can suffer permanent damage, regardless of valuation. However, this is a different risk than simply paying too much for an otherwise healthy company.
Chuck concludes with a simple but powerful message: valuation matters, a lot. Markets may overvalue stocks for years, but eventually prices revert toward fundamentals. By focusing on earnings, cash flows, and valuation instead of price momentum, investors can significantly reduce risk and improve long-term results. As he reminds viewers, knowing the difference between price and value is essential for successful investing.
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Disclosure: Long ES, GPN, O, PEP, PYPL, SWK
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
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