Sure, we all feel like geniuses now, right? We stuck it
out -- "it" being the worst economic crisis since the Great
Depression -- and have now enjoyed fat and happy double-digit
gains ever since the market hit bottom in March.
There's surely more to come, right? Right?!
Survey says …
Who knows? We Fools pride ourselves not on making
market calls, which are a great way to get slapped silly by
the market's invisible hand. Rather, we take pride in our
fundamental focus. Is a company's market share likely to
shrink or grow? Has its management team delivered the goods
over the long haul while deftly navigating both up markets
and down? And in terms of valuation, does the firm's stock
look like a blue-light special or a high-end luxury item?
In my experience, that last element -- valuation -- is
often the toughest taco to crack. Some companies never look
cheap, after all. Others that appear to be bargains may turn
out to be value traps instead. Still, in general terms, one
thing remains true: When a company sports moon-shot
multiples, there's little opportunity to cushion the blow
when the overall market hits the skids or when the company
itself blows up.
The higher they fly, the harder they fall
For example, take
Research In Motion and
Google . The former has gained 65% year to
date, even after factoring in its recent dramatic slide. The
latter has increased by some 80%. Yet sneaking a peek at
this illustration of recent historyshould be instructive
for folks who currently own either company's shares, as well
as Fools who may be considering a purchase.
Could investors have foreseen the slide that chopped at
least 50% off each company's value? Perhaps not, but if
they'd tuned into each firm's valuation, savvy investors
might have dodged a bullet by taking gains, waiting for
valuation gravity to work its magic.
Shortly before its 2008 slide began, Research In Motion
traded at a level that priced in more than 60 times the
previous year's earnings. Google, meanwhile, sported a P/E in
the 50s back when we were celebrating New Year's 2008. And
while both companies have since recovered, RIMM now trades
with a P/E just south of 20, while Google has clawed its way
back to 38.
Bottom line: A little valuation discipline can go a long
way. When an all-but-inevitable market pullback arrives,
highfliers can be sitting ducks -- and future bargains, at
least in relative terms.
Good company, lousy investment
Along those same lines -- and following robust run-ups
of more than 40% over the last three months alone --
Citigroup (NYSE: C) and
Freeport-McMoRan Copper & Gold (NYSE:
FCX) could be cruising for proverbial bruisings. That goes
double for
Southern Copper (NYSE: PCU), whose current
P/E hovers above 50 -- more than five times the
company's average over the last
half-decade.
Last but not least:
Caterpillar (NYSE: CAT), which is currently
priced at nearly 30 times analysts'
earnings estimates for this fiscal year. Given the eternal --
and generally erroneous -- optimism of Wall
Street's Gucci-loafer set,
that's way too rich for my blood.
That's particularly true, moreover,
given the company's deep economic
sensitivity -- and the still-plentiful number of long-haul
overachievers trading on the cheap:
Johnson & Johnson (NYSE: JNJ),
Pfizer (NYSE: PFE), and
PepsiCo (NYSE: PEP), for example, currently
weigh in with multiples below the broader
market's and their own five-year
averages. Continued... |