Shares of Telstra Corporation Ltd (ASX: TLS), one of Australia's largest and most recognised companies, have fallen 28% in a year.
TLS share price
The chart above compares the 'safe' blue chip Telstra with the broader Australian sharemarket, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), over the past year.
As can be seen, it's been a hard year for owners of the telco heavyweight.
Are Telstra shares 'safe'?
Ben Graham, often called 'the father of value investing', famously said that in the short-term the sharemarket is a 'voting machine' and over the long run it is a 'weighing machine'.
What he meant was that the share prices of companies will be influenced by the popularity or trend of a company, industry or technology in the near term (say, up to three years). But after three years or more, the company's share price will move with the profits or the underlying health of a business.
For example, Bitcoin and marijuana companies are in vogue now and their share prices are lofty. But soon enough investors will come to their senses and realise that neither of these things has a leg to stand on.
Voting machine
Telstra's share price flew from a low of around $2.60 in 2011 to over $6.50 in 2015. A 150% rise.
At the same time, investors were falling in love with dividend shares due to plummeting interest rates on term deposits.
Weighing machine
Over the period that Telstra's share price rose 150%, its profits had risen at a rate of less than 5% per year. That means Telstra's share price rose because its valuation was stretched. After all, it wasn't growing profits that fast.
The way I like to judge sentiment is to look at the price-earnings ratio (P/E). Telstra's P/E went from 11 to 17. Now, it is 13.
Is it a buy now?
A new wave of renewed 'sentiment' could sweep through and lift Telstra's shares back above $6. However, I think it is unlikely.
In my opinion, the best strategy to put the chances of long-term investing success in your favour is to value a company's shares using its cash flow. It's far from guaranteed. But at the very least it will help you to keep a check of your emotions.
As I have said before, I will consider buying Telstra shares — all things the same — if the share price falls materially below $4.
