Bob: When there is no 'E' then the p/e is not such a great measure. There can be no 'E' for many reasons -- and this is what must be sorted out. With AZMN, it seems unlikely there will ever be an E -- so what is the right price for the stock? Zero -- nadda. For some companies the 'E' will come, but later on in time. With those companies you should expect them to trade at a low p/e based on future earnings -- low because you have to wait for your money, and low because those profits have a risk of never materializing. A third reason for no 'E' is that the profits are cyclical -- follow the business cycle and/or have their own investment-related boom-bust cycle (like the chip sector). These companies should be valued like auto stocks, but with a growth premium. In most cases, that will leave you with a p/e not too far from a market multiple. Let me give you an example -- in 1995, INTC had a market multiple of 11, yes, 11. Perhaps that was too low. But when the multiple shot up to 50 in following years while the company was at peak 'E', well it does not take a brain surgeon to tell you that investors had lost sight of the cyclical nature of the 'E' of INTC. Here was a stock price that could only head south. I forget whre SUNW was in all of this, but I think it had a p/e of around 100 -- astonishing really.
But by far the strangest p/e's were the ones with really low 'E' visibility -- why? Because a mantra developed called 'unlimited potential'. According to this fascinating perspective, investors should be willing to pay an astronomical premium for stock in companies where there is enormous uncertainty about future prospects -- why? Because they could have 'unlimited potential' for all we know. Valuation? Hah. Stocks with unlimited potential don't need that -- how can you put a price ceiling on unlimited potential? These stocks traded on press releases with very funny fudging statements hinting at 'unlimited potential' If a guy came on tv and said $400 dollars, easy, then investors poured in their dough. The most important question an investor needed to ask was "do I believe" in this stock, cause I sure as heck can't calculate anything to arrive at a decision to buy or sell. 'True believers' decided that this was some kind of internet-economy manifest destiny and decided that believing needed to be separated from the world around us -- like oil prices, interest rates, international politics, competitive pressures, industry structure -- nothing mattered to true believers. They decided to believe no-matter-what. And for these rare individuals, who, by the way, thought of themselves as the 'leaders' of the 'new economy', for these guys there was this belief that you could not pay too much for one of their stocks with 'unlimited potential'. Now, you might say, what about the risk. No problem, just own a basket of stocks with unlimited potential and you will be fine. It was and is as close to pure bull-roar as anything you will find in the history of investment. The 'new economy' was no longer about productivity growth and improved standards of living ala the Greenspan view of the world. It was now about unbridled stock speculation led by some of the most ignorant and in some cases slimiest charlatans ever to separate a sucker from his money -- and the sheep thronged to get fleeced. Now people at least mention valuation -- but of course they have no experience with the concept and get confused. For many people, valuation is based on how much a stock is up or down. If a stock has come down 90% it must be at a 'reasonable valuation' -- or so goes the thinking. Only now we are finding out that a stock when already down 90% can go down another 90% -- why? Because it was trading at 100 times its valuation -- a true bubble. ARBA is a good example. How could these stocks get 'THAT' far from reality? Unlimited potential -- oh yes oh lord.... I still believe. LOL |
