If you keep playing with that, you’re going to get hurt.
© Suzanne Coleman, all rights reserved.

by,

Suzanne Coleman

Is that even a word?  I have been wanting to ask the stock trading community this:  what is reasonable, and what is not?  Let’s talk PE.

I started trading during the “birth” of the internet, basically when companies that utilized it for profit were being born and growing, and the computer industry came along with them hand-in-hand.

At this time, people were piling into technology stocks, why wouldn’t you, when all they do is keep going up?  PEs were insane, or that’s what the older generation told me.  They were normal to me 🙂  I was told that a good, stable company should have a PE of 7 or 8, and a high-growth company might be safe at a PE of 15.  Hmm…

Well, in the internet days, a good stable, safe company would have a PE of 30.  An insane company that everyone wanted to own (was it cool like an iPhone?) might have a PE of over 100, up to, gosh I can’t even remember for sure, but probably up to 500-700.  Yeah, like I said, it was insane.

So now, almost 20 years later, I am looking at stocks again, some of the very same stocks I watched or owned back then, and trying to adjust to today’s market psychology and culture.  It’s hard.  Here is why.

Let’s start with a biggie, Amazon (AMZN), wow.  Well, I had that sucker for a really long time, I believed in it, I thought this damn company has a great idea, it will change the world.  Well, it did…  But its stock price fell along with many other great stocks during the “hell freezes over” period of my investment history.  That was in the early 2000s if I recall correctly.  So, I was holding on to it, it was once maybe $350 or so, and then came down to maybe $84.  Finally I decided to sell it, I was being too LOYAL (big issue to avoid), holding on to it, hoping it would eventually return to its glory days.  Well, then, of course, it did rise back up after years of just sitting there like a lump on a log (while I waited), and now it’s back up to over 300, and has even been at 400.  Wow.  If only we could predict these things…

So here’s the rub, AMZN is now at 310 with a PE of… ok, I guess they are now losing money so the PE is not listed.  Not too long ago, it was in the hundreds, maybe like 600?  My question to you all, is this, why would you continue to buy up a stock that is seriously over-valued?  I mean, you could lose almost all of your money if it drops down to where it should be.  It seems a bit like drug-induced insanity to me… what am I missing?  Have I gotten too old for this?

Then on the opposite side of the insane spectrum, let’s look at Apple (APPL).  They just reported earnings that were 38% over expectations.  No big deal, right?  Because we all know that Apple has a great history of blowing away even the highest of earnings expectations.  Are we nuts?  Maybe.  Their PE before this data was factored in was about 17.  Pretty reasonable for a company that is still growing and spreading into places like China, with over a billion tech-hungry citizens.  Why not buy Apple?  I’m not sure when Apple became this generation’s IBM, but that’s what it looks like has happened.  Almost no activity on the earnings news, or before it.  Odd.  The 12-month target will be revised upward and the stock price will go up with it.  So, you would think there would be buying now.  Maybe they are expecting a dip tomorrow or this week.  Maybe they fear… any of many things which may impact this activity.  But if you conclude it’s an overall conservatism, it is not.  See… Netflix (NFLX).

Netflix also reported better than expected earnings, just a few days ago (and I really should have bought it when I thought about it at 380, damn…) and is since up over 20%.  Their PE is over 100.  Hmm…  yes, they are also expanding into areas around the world, which is smart, but to buy in at a PE of 100 or more, isn’t really that smart.  I wonder if the “reason” that people do this is that they think it’ll (like Amazon and Yahoo! used to) keep going up, and if they don’t buy in now, they’ll never get to own a piece of it at these prices.  And, so far, in this instance, well this week, they’ve been right.

Look back a few months and you’ll see, well, let’s go to a 12 month chart… you can see that Netflix, like many other stocks these days that seem to do well, has been all over the place, with prices rising and falling significant amounts.  There is a high risk of buying in at a high point, and riding it all of the way down into the subway station.  And then, if you choose, you can end up waiting there for a plane to show up and fly you back up into the clouds.  Dramatic?  Yes, it can be.  There can be tears, there can be exhaultation (literally), so how and when do you decide to jump on a train and see where it will take you?

Let’s go back to Apple.  Strong growth, strong earnings, stable company, good leadership.  Since other big, stable companies are reporting earnings declines and less-than-enthusiastic forecasts, wouldn’t you expect more investors to move their money into Apple and out of those losers?  I mean, growth and stability, how can you go wrong with that?  We’ll see what happens.  I know that most big investors are already in Apple, that may be why there hasn’t been much movement today after earnings were reported to the public.

So what do you think?

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