The Education of an Investor II: Quality > Price

It takes a man a long time to learn all the lessons of all his mistakes – Jesse Livermore

It is better to buy a wonderful company at a fair price than a fair company at a wonderful price – Warren Buffett

In “The Education of an Investor” (July 29, 2025) I told the story of two stocks I bought in 2017 – Kroger (KR) and Teva (TEVA) – that taught me a most important lesson. I bought both stocks for the wrong reason: they were cheap on a forward P/E basis. But in the case of KR – as I discussed in that blog – I got bailed out because it’s a decent business that steadily grew earnings and the stock price climbed along with them. In the case of TEVA, earnings went nowhere and as a result the stock didn’t either.

Another stock that played an important role in my education is Palo Alto Networks (PANW) – a leading cybersecurity stock. PANW has always been expensive on a forward P/E basis. Very expensive. Like 40-50x. And so – based on my simplistic philosophy that mainly relied on the forward P/E ratio – I frequently shorted PANW in previous years only to get run over as the stock continued marching higher.

It wasn’t until early this year as things began to coalesce for me and I understood that the quality of a business is a far larger determinant of stock price performance than the initial price that I actually bought PANW (as part of the Cybersecurity ETF (BUG) which is filled with other fast growing, high priced stocks). To restate what I wrote in the earlier blog, the reason high quality businesses outperform is because they are able to compound earnings at a high rate over long periods of time and the stock price follows earnings.

PANW just now reported their 4QFY25. Unsurprisingly it was another excellent quarter and year. PANW earned $3.34/share in FY25 – up 17..6% from $2.84 in FY24. In FY23 they earned $2.22, FY22 was $1.26, FY21 $1.02 and FY20 81 cents . The CAGR in EPS over the last 5 years is just under 33%. PANW is guiding to another good year in FY26 with EPS of $3.75-$3.85.

The stock is currently up 5% in the after hours to ~$185 giving it a forward multiple of nearly 50x. But even though the growth rate is slowing I won’t be selling because PANW is a leader in a sector in a secular bull market that I don’t see ending any time soon.