Wow! You really do have a strong opinion on this one! I likewise respect your point of view and I think you are wise to be wary of investing in a stock with a 100+ PE. You can (and did) list several other software companies which could not live up to hefty expectations. However, I can just as easily name those which have. Wouldn't you have loved to have bought MFST or ORCL back in 1987 at 120 times that year's earnings? You would have made a bundle and the shorts would have lost a bundle. I am not trying to convince you that PSFT is a compelling buy at its current price. Rather, I am simply trying to point out that a high PE alone does not mean that a stock is due for an imminent fall. In the two and a half years that I have owned PSFT, I don't believe the PE has ever been below 90. If it has, it didn't stay there for long. The high PE has not stopped the company from prospering or prevented the stock from rising. And it certainly hasn't precipitated a fall. That's all I'm saying.
Beyond that, I'd like to reply specifically to a few of your points.
1) I am not a saleman, I'm an implementation consultant. Clients hire me to install and customize their off-the-shelf software after they have bought it. In this capacity, I actually get my hands on the software rather than simply giving sales pitches. It may be a minor difference from your standpoint, but I mention it because it gives me two advantages over other investors when evaluating companies like PSFT: (a) I've "looked under the hood" on these applications, and (b) I've talked face to face with the people who buy them. I think the underinformed 90% you refer to may appreciate this.
2) When you say that my opinion is "wrong, inherently contradictory, and misleading", I think you are mischaracterizing my position. It is my opinion that PSFT's current price fairly reflects its future prospects, regardless of its admittedly high ratio to last year's earnings. That is not "wrong" or "contradictory", and I am not trying to mislead anybody. It's just my opinion. Take it or leave it as you like.
3) >>A stock can't be "fairly valued" if you "look beyond the numbers on the income statement."<< I submit to you that you HAVE to look beyond the financial statements to fairly evaluate a company's worth. You have to ask questions such as the following: How do the company's products stand up to its competitors with regard to quality and price? How well is the company managed? What are their future plans for growth? What are their customers saying about their level of satisfaction? etc, etc. None of the answers to these questions can be found on the financial statements. This is not "gestalt" valuation. It is absolutely necessary to separate the longterm winners and losers. If we only looked at the income statement, all stocks would sell at the same PE! Now that's what I call "ludicrous".
3) >> Do you really expect that you are going to make the same return next year? Do you really think that this will keep going? << I honestly do not expect to make another 15 times my money in PSFT over the next two and a half years, but I would not be surprised to gain another 2 to 4 times my money. :-| (Perfectly straight face.) I know you think I'm crazy, but the market is big enough, the competition is lax enough, and PSFT is aggressive enough to do it. Again, based on my own observations.
4) >> Peter Lynch made one thing emphatic in his writings: NEVER INVEST IN A STOCK WITH A P/E GREATER THAN 10. << Actually, I don't recall reading anything so emphatic in Lynch's writings. It is true that he cautions investors about the risks in high PE stocks, but he also cautions against investments in technology stocks in general. If you follow his recommendations to the letter, you will never buy any high-tech stocks. I mentioned Lynch only to reference his main point: You have a distinct advantage in evaluating a company's prospects if you have firsthand experience with their products. I really don't want to get into a "Lynch said this... Lynch said that" discussion.
5) >> New investment into PSFT is HIGHLY RISKY << Yes, I do agree with you there. Just as an investment in any stock is risky. But shorting stocks is risky too, and given PSFT's current price and prospects, I choose to remain long.
Peacefully submitted,
Tom |
