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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club -- Ignore unavailable to you. Want to Upgrade?

To: Chuck Rubin who wrote (6722)	7/12/1999 3:42:00 AM
From: Carl R.	Respond to of 15132

Biotechnolgy was not a fly-by-night phenomenon, and continues to be an important tool for drug research. In the 20's the auto industry was not a fly-by-night industry, and neither was the radio industry. Despite that fact that all three of these sectors were enduring and growing parts of the American economic system, they all became overvalued and suffered a 80-90% drop in stock price before moving forward. I agree with your enthusiasm about the future of the internet, but I also expect that internet stocks will at some point in the next couple years suffer a 80-90% drop in price. While that drop will not change the fact that the internet will be a growing an important part of the economic systems, it may be disconcerting at the time for some investors. The question I always want to ask internet investors is this: what is your favorite internet stock, and at what price would you sell it? On every stock I own I have price targets at which I consider the stock to be undervalued, fairly valued, and overvalued. Unfortunately most internet stocks currently reflect 5-10 years of ideal growth, and therefore seem to have little potential for appreciation if things go right, and the chance for disaster if things go wrong. Let's look at an example. Consider RTHM, with a PSR of 1700. If they double in size every year for the next 10 years the PSR would drop to 1.66. If in 10 years they will achieve a 15% margin, they are currently selling at 4 times 2009 earnings. If the PE ratio in 10 years will actually be 30, that implies that over the next 10 years the stock will return 22% a year. That's not bad, but what if the sales don't grow by 1000x over the next 10 years? Suppose they only grow to 300x as big? That would still be impressive growth, but the return would drop to 8%, and you can get that in bonds with a lot less risk. And if sales only grow by 133x (63% a year) in 10 years you actually lose money on the stock. Thus in buying RTHM today, you are betting that growth will be dramatically better than 300x in the next 10 years. Maybe it will be, maybe it won't. But before you buy them at these prices, you should be clear in your own mind what you need to have happen in order to make money long term because eventually these stocks will be judged by the same metrics as other stocks. I'm not trying to pick on RTHM, by the way. The point is merely to clarify what you should be thinking about in judging what these stocks are worth. Carl