I realize that I'm new to the trading game, but I can't understand how AMER got so over-valued even in a bull market. (Is this called momentum investing?) Moreover, I don't understand why the price hasn't dropped even more rapidly.
I downloaded stock and earnings estimate reports from (you guessed it) AOL in late June. Some of the interesting numbers were a ROE = -7.6, a current ratio less than 1, and a debt/equity = 12.5.
To AOL's credit, there revenues increased from 116M in FY94 to 394 in FY95, though the net profit = -34M. I calculate a P/E = 35 for FY97 based on the estimate report and today's closing price (I think this is a generous estimate). Is it customary to purchase shares knowing that it will take several years (with no increase) for them to reach a fair value? Are analysts able to adequately discount future competition in their estimates?
One thing I've found interesting about the Market is the apparent belief that one company will be the sole marketer of a good idea or product. Why else would companies such as IOMG, NSCP, and AMER trade at such high P/E's? I would think that the much-mentioned case of MSFT is a rare anomaly rather than the norm and that investor's would go broke trying to guess who will be the next MSFT.
I guess that the FY97 estimates for this company are way to high. I think players such as AT&T, MSFT, and even NSCP will soon have internet products available for the computer illiterate. Besides, from experience, I sense that the novelty of AOL has diminished for many and that AOL's high subscription rate is causing many to flee (I canceled mine last week-will have to nab earnings estimates from wealthy relatives who can afford to remain with AOL). At the very least, AOL will have to reduce rates (and revenues) to maintain their customer base.
With so much uncertainty in this market, why would this stock trade at such a high P/E? Based on today's P/E of 186, I think that a value in the low teens is a fair price for this stock. Yes, today, in a moment of greed, I shorted this stock at 30.5. It's now at 33.5, but I'm still more comfortable with a short at 30 than a long at 33. Does anyone have a realistic argument as to why this stock would continue to trade at a high P/E? Why did it bounce off a low of 27.5 today? Were shorts covering and selling? An analyst interviewed in today's WSJ on-line stated that AMER was the most over-valued stock in the country. I take some comfort in this fact. I also hope this stock hits the teens soon so the long's that I hold at a fair value will stop plummeting from the negative momentum generated by these over-valued guys. |
