Am I missing something Yes, Vickie. . .valuations.
To all. . .
Which is the better stock to own? Bank of America or Verisign?
And how do you know?
Well.. .we all bought VRSN at one time or another. . .and rode it up to the heights. But those that understand valuations were quick to sell when it turned south. But why? What is suddenly wrong with VRSN when it turns south?
For the answer to that, we must look at valuations. Bank of America has a price to earnings ratio of about 12. In other words, a years worth of earnings times 12 equals the current price of the stock. The average stock has a PE ratio of about 29.
So at about 54 bucks per share. . divided by 12. . tells us that Bank of America is putting up $4.50 earnings for each of the shares of stock outstanding. Then multiply the number of shares times the stock price and you get the market capitalization. . .which is nearly 91 billion dollars.
Now. . . does that sound like a good stock to own from a valuation standpoint? Does Verisign still sound better than Bank of America. . .because it is an internet stock? And they just bought Network Solutions, another internet stock. . . so does that make them more desireable than Bank of America?
Well, lets look at the valuation of Verisign with a Mkt Cap of 13.8 billion dollars. Bank of America has Price to Earnings ratio of about 12. What do you think Verisign's Price to Earnings ratio is? Or how many times a years earnings is the price?
I'll give you a hint. . . it is much more than 12. 120? Higher. . . 300? Higher yet. How about 1000 times earnings? Would that still make the stock worth owning? How about 100 times that of the Bank of America PE? 1200 times earnings? Is it still worth owning.
Well. . . .are you sitting down?
Verisigns PE ratio is 4437. No mistake. . . the price of Verisign, which is 133 5/8 is Four-Thousand-Four-Hundred-and-Thirty-Seven times earnings. In other words, the company made about .03 cents in earnings. . . which in another way can be expressed like this. . . at the current rate of earnings, it would take the company 4,437 years to earn what the company is selling for right now.
NOW! Which stock would you rather own when the markets turn south? VRSN or BAC? And that is why we rotated when we did several weeks ago. It could be a long drop from a 4437 PE. . . and that figure was from today. . VRSN is already $50 off the high of the year.
Now get this. . . many of the companies we love make ZERO earnings. . .they actually lose money each year. Now what are they worth? Which companies am I talking about? Do you think it is just a few that nobody has? Think again. The following list of stocks have PE ratios of ZERO. . .because the company actually loses money each quarter.
JDSU, JNPR, TERN, VIGN, EXDS, ARBA, CMRC, INKT, SCMR, NXTL, INSP, AETH, ELON, ADAP, NTRO, PPRO, VERT, etc., etc., etc.
So when you say "Stop the insanity!" That is exactly what the market is doing. Too many tech stocks are WAY too overvalued. . .and at some point, the air must be let out of these balloons. This is healthy, so that we can make further gains later on. . . by pumping air back into our favorite balloons once more. That is simply the way many tech stocks work. And the big ones like Cisco and ORCL are also very overvalued.
The reason we are having such a hard time seeing the bottom on tech stocks, is because we allowed our balloons to fly beyond the atmosphere.
Selling is not, therefore, adding to the problem. . .but rather leading to the solution. The problem was that we bought and bought with no regard for valuation. And now it is simply time to pay the piper.
Rande Is |
