good post, Jack:
I think it summarizes why so many investors are selling stocks with single-digit PEs, and buying companies with triple-digit PEs (or no E). My main problem with that argument is that everyone now believes it. The process of buying growth stocks (or concept stocks) and selling value stocks, has reached a point of absurdity.
Let me give you an example of 2 companies that I have been following for years:
CMH is a very boring company. It's a small cap, family run, mobile home manufacturer. Quarter after quarter, for the last 20 years, it has turned in EPS increases of 14-18%. They have a pristine balance sheet, and buy back shares every quarter. You can buy the stock now for a single-digit PE.
CSCO is an exciting company. It hasn't been around for 20 years, and its industry gets transformed every 6 months, so guesses about the future are much less certain. But, I would agrea with you if you told me that CSCO's future EPS increases will be 3 times higher than for CMH. You can buy the stock now for a triple-digit PE.
If I buy CSCO, instead of CMH, then I am paying far more for present earnings, and also far more for future earnings. It is reasonable to do that, to a certain extent. But the market, controlled by momentum "investors", has gone far past that point. I would be willing to buy CSCO if it was available at a PE of 3 times that of CMH. I'd even be willing to do that using 12-month forward earnings in the PE calculation. That is reasonable, and is justified by the companies' future prospects. But the differential in value vs. growth companies' PEs, in today's market, is not reasonable. As I say, it has reached a point of absurdity. The market always overshoots, in both directions, and that is what is happening now.
And, by the way, if you don't think rising interest rates are going to affect the stock of companies with triple-digit PEs, then you are ignoring (or ignorant of) all past economic history.
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