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 last March.
There's surely more to come, right? Right?!
Survey says…
Who knows? We Fools pride ourselves not on making
market calls, which is a great way to get slapped silly by
the market's invisible hand, but rather on 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 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 nearly than
90% year to date, while the latter has increased by more than
40%. Yet sneaking a peek at
this illustration of recent historyshould be instructive
for folks who may 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 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 in
the 20s, while Google sports a multiple of just south of
40.
Bottom line: A little valuation discipline can go along
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
Following robust run-ups over the last six months,
Wells Fargo (NYSE: WFC) and
Texas Instruments (NYSE: TXN)
looked priced to fall, too. That goes double for the likes of
Intel (Nasdaq: INTC) and
Goldman Sachs  (NYSE: GS), both of
which sport P/Es north of 30. That's right: Current
purchasers are apparently willing to pay more than 30 times
earnings for the privilege of owning their shares.
Make no mistake. Like Google and RIMM, these are fine
businesses; their stocks just aren't finely priced. Indeed,
with their swollen multiples, the downside risk of dreaded
"multiple compression" is just too great, particularly when
long-haul overachievers like
Procter & Gamble ,
Pfizer (NYSE: PFE), and
Verizon Communications (NYSE: VZ) are trading
for a proverbial song.
If those discounted cash-cow gushers aren't the droids
you're looking for -- and if you're really focused on
high-flying heavyweights with ample room to run -- consider
Berkshire Hathaway (BRK-B). It comes with a
Grade A equity portfolio, not to mention CEO Warren Buffett.
I consider Berkshire basically a bargain at any price, even
one that currently reflects a hefty premium relative to
earnings. Continued... |