Mad2,
I disagree with your statement..."My objection to the long side of GUMM has to do with it's very poor fundamentals (revenue, book, profit) as that forms the base of support when the hype and momentum is gone."
There are many reasons why people buy and sell stocks, but in general, stock prices discount the future and not the past. This was one of the salient points in my last post to you, which you seem to have either overlooked or ignored. Using past data to slam current valuations is fallacious in instances where a stock price is correctly discounting future earnings growth. Therefore, I claim that the basis for support of a stock is the markets' expectations for future earnings and not the current balance sheet or price to sales ratio.
Incidentally, I was attracted to ASHW, another stock that I own, because of the low valuation in comparison to industry averages. The stock hasn't responded well in the past two months primarily because expectations for future revenue and earnings growth are not being met. In other words, the stock is cheap and there is a reason for it.
My comparisons to YHOO, AMZN, etc... were only meant to show that sometimes people pay what looks like a lot of money today in anticipation of future earnings. While you can argue that YHOO is a leader in an expanding market, that really makes no difference to my analogy. Some might even argue that GUMM is a leader in an expanding market for drugs delivered through chewing gum; however, this isn't important to my point.
The salient points in my last post were:
1. The value of a stock today depends on the markets' cumulative expectations for future earnings. Valuations based on fundamental analysis using current income statement and balance sheet data can be misleading. It is far better, IMO, to use forward looking estimates when using fundamental analysis to justify a stock position. You can use the estimates of analysts, or make up your own if you feel qualified to do so.
2. GumTech's fundamental ratios would be reasonable if they do $24 million in revenue, earn 47 cents per share in 1999, and the stock trades to $24. Whether or not I think the company will meet these expectations isn't important. I'm simply pointing out that if it works out this way, the ratios that you feel are inflated today would not be inflated then.
3. There's no doubt that the current price of GUMM discounts better earnings in the future, and I agree with you on this point. There is a chance that YHOO, et al, will fail to meet expectations and their stocks will fall. There is also a chance that GUMM will fail to meet expectations and the stock will fall. Whether YHOO, GUMM, or any other stock has a better chance of not meeting expectations is very subjective and not important to my point.
4. If you believe the estimates, you buy GUMM. If you don't believe the estimates, you either sell GUMM or short it. I think this is the bottom line.
Dan |
