True 'The reason a stock's PE is high is because the investors want to pay whatever price to own the shares of that stock.'
Sure, but that's just tautological: the reason CSCO is at 101 1/4 is that there are buyers willing to pay that much, and sellers willing to sell for that much.
It begs the question: why do investors want to pay that particular price for the stock? Beware the stock that goes up because people are willing to pay more for it because the stock is going up, because when the music stops, those still holding get taken to the cleaners. AMZN's quick trip from the low 100's to 199 at the beginning of this year is a case in point. Somebody out there is sitting on a boatload of AMZN they bought a month ago for 199, thinking, "Hey, I thought this e-commerce stuff was supposed to be hot!"
In the long run, it really does take earnings to support a stock price. CSCO, of course, is a completely different beast than AMZN. It has real profits, and bright prospects. I'm certainly more comfortable with its valuation at 101 than I was at 117. But there is still risk. Short-term, the market is very emotional (sometimes I'd say manic-depressive). It doesn't seem inherently implausible that at some time in 1999, the market will decide that CSCO deserves a P/E of 35. That would take its price into the mid-50s. If history is any guide, and it generally is except when it's not, that will be a very good time to load the boat. |
