As I noted yesterday, there are a lot of over-hyped, over-valued stocks out there and the more of them that go down in flames, the more people will begin to reflect on the true value of the stocks they are holding and, eventually, the market begins to reprice to a normalized price to earnings ratio which is, sadly, 20% below where we are now.
Now, I know a lot of guys would make that point their whole article and write 3 or 4 pages on it but I prefer to just put up a simple chart and move on. You are just one google away from checking the facts – I suggest you do so with me or anyone you read – I'm just assuming you are a smart person who routinely does that, so I try not to belabor my points if I can make them quickly. That does not mean, however, that they aren't important!
And keep in mind that's the average p/e ratio – at PSW, we like to buy companies that are better than average, the ones I'm worried about (see yesterday's post) are above the average – especially ones that have p/e's above 50, which means it will take 50 years for the company to make back the money you are paying for a share or 2% per year – WORSE than even the pathetic rate of return on a 30-year note. Logically, that should be your benchmark for avoiding a company, right?
Now, the mitigating factor there is growth. If the company is growing, then you might think it's OK that, at the moment, it may be making 2% but maybe, in the futures, business will double and it will make 4% back on your money and then double again and make 8%. That's the logic behind investing in Amazon (AMZN), Tesla (TSLA), NetFlix (NFLX), etc but the problem is – companies don't tend to double up very quickly and, if you need 3 doubles just to get to where we like to start (p/e below 15) – you're going to be years and years behind us in value.…
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