When we make an investment decision at Rebound Capital, at least half of our research time is devoted to building a valuation model and identifying the optimal entry point. While it might seem overkill, your entry price ultimately determines your return on the stock.
Here’s legendary investor Peter Lynch on the same:
I ran $15 billion at Fidelity Magellan and the single biggest lesson I can give you is this: the price you pay is the only thing that determines whether you make money or lose money over time. Everything else is noise.
I have seen people buy the greatest companies in the world—Coca-Cola, Disney, Gillette—at 50, 60, 70 times earnings because they were convinced the growth would never end. When the growth slowed even a little, the stocks got destroyed. Quality didn’t save them. The price killed them.
I have also bought companies that were absolute dogs—companies losing money, companies in dying industries, companies nobody wanted—and made 10 or 20 times my money because I paid so little that the only direction was up. The margin of safety was in the price, not the story.
There is no such thing as a good stock at any price. There is only a good price for a stock. Pay too much and you lose. Pay little enough and you can be wrong about almost everything and still win.
I made 29 times my money in La Quinta Inns, a company nobody ever heard of. I made 20 times in Philip Morris when it was the most hated stock in America. I did not need a crystal ball. I needed a low price.
That’s been true since 1920 and it will be true in 2120. The price you pay is the only margin of safety you ever get.
With AI hype still strong, we see absurd valuations assigned to companies as investors project current growth to continue forever. While no one can be certain when this bubble will pop (or even if this is a bubble), history offers a cautionary tale.
Here are three “quality” companies that left investors in the red for decades because they paid too much!
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#1 Cisco Systems ($CSCO)
We all know what happened during the dot-com bubble: “Internet traffic was doubling every three months.” Where else would be a better investment than Cisco, which was providing the underlying infrastructure supporting this boom?
But if you had invested in Cisco at the top of the dot-com bubble, over the next two years, you would lose 90%, and it would take you 21 years just to break even.
The surprising fact that most of us miss?
Cisco’s underlying metrics continued to improve throughout. In 2000, Cisco reported $2.6B in profit on $19B revenue. Twenty years later, the company reported $12B in profit on $51B revenue. Even as the company's earnings grew 4x, the stock went nowhere.
#2 AT&T ($T)
AT&T is the best example of a “utility stock” becoming a “tech stock”. At the peak of the dot-com bubble, AT&T was treated as a growth stock (P/E of 28x) because it was aggressively acquiring cable companies such as MediaOne and TCI, which were poised to dominate high-speed internet.
The irony is that in 2000, mobile data was nonexistent. By 2020, AT&T was managing a network at a scale unimaginable during the bubble. Yet, the stock went nowhere for two decades.
After the bubble burst, the market re-rated AT&T as a utility stock (P/E of 10-15), and the resulting multiple contraction decimated the stock price. Suddenly, everyone realized that, unlike software companies, AT&T needs constant, multi-billion-dollar upgrades just to keep pace with the competition!
#3 Coca-Cola ($KO)
This one’s my favorite! Just as the dot-com bubble was in full swing, many value investors were concerned about the sky-high valuations of tech companies and then piled into the “safe growth” of Coca-Cola.
With everyone chasing the company, Coca-Cola’s P/E ratio hit a staggering 50x in 1998. Over the next 15 years, as earnings grew, the P/E ratio compressed from 50x to 18x. That meant that even after adjusting for dividends, the investors who got into Coke in 1998 had to wait 13 long years just to break even!
While not on the same time horizon, AMD demonstrates the effectiveness of our valuation model. AMD is the only sell recommendation we have made at Rebound Capital (after realizing a 63% upside in 3 months).
Here’s what we wrote just after the AMD x OpenAI deal in October.
AMD’s intrinsic value is ~$200/share. We recommend selling AMD at this price point. Even if AMD services all 6GW from OpenAI in the coming 4 years and continues to grow all other parts of its business, it will be worth ~$200/share.
To put it simply, the valuation has run way ahead of the business fundamentals. This is a classic scenario where a strong catalyst cause an undervalued stock to become overvalued overnight. Given that we have made 60%+ gains in just 3 months (our expectation was 2-3 years), it’s prudent to prune our position now and wait for a better entry point. — Rebound Capital Oct 9th 2025
And here’s the stock's performance since then.
Overpaying for companies rarely works out, no matter how fast they are growing. Projecting current growth to last forever is a classic mistake most investors make. We don’t have to go back to the dot-com bubble to prove this — just look at the performance of some of the pandemic darlings.
Peloton — Down 96%
Zoom — Down 84%
Docusign — Down 77%
Just to be clear, we are not saying that all the AI companies are in a bubble. We have our own capital invested in a few AI companies in our Rebound Portfolio that are at a palatable valuation.
The precursor to nearly every market crash is everyone crowding into a small subset of the economy.
To close, we leave you with what Scott McNealy, CEO of Sun Microsystems, told Bloomberg just after the dot-com collapse in 2002.
“2 years ago we were selling at 10 times revenues when we were at $64.
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends.
That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate.
Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes.
What were you thinking?”
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