There are good reasons...

Investment Analysis Clubs Saul’s Investing Discussions
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There are good reasons while some stocks are priced unreasonably high and others are not.

Public Facing
Everyone has heard of Amazon, and most people have bought something from them. It gives the illusion that they are very profitable (they’re not). No one who’s not in the railroad business has heard of WAB. The fact that WAB grows much faster than AMZN doesn’t matter. AMZN gets the big PE.

Boring
Railroads are boring. The MF SA board for WAB has had a total of 132 posts since it was recommended back in 2012. Just 20 in the last year. The MF HG board has had 26 posts TOTAL since 2012. 26 posts! The fact that the stock isn’t boring and has gone straight up didn’t make a difference. XPO and WPRT had exciting stories. The fact that neither of them had ever made a dime of profits didn’t matter.

Glamor
UA has glamor. You see it on TV at all the sporting events. SKX has earnings growth. Who gets the high PE? I’ll leave it to you to guess.

UA’s trailing earnings the last three years have been
61 cents
75 cents
95 cents

Does that warrant a PE near 100 times earnings???

SKX’s trailing earnings the last three years have been
19 cents
$1.16
$2.99

Does that warrant a PE of under 25??? But Skechers shoes are boring (my wife has never bought another brand shoe since her first Skechers).

And with UA making 95 cents a share, and SKX making $2.99 a share (more than three times as much), which has the higher share price? UA! Based on these facts, would you pay more for UA per share, just for the glamor? People do! $12 more! It’s insane!

Saul

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Hi Saul,

I disagree with some of the thinking in this post.

I don’t think we should even think of comparing AMZN and WAB. They are in different industries with very different dynamics. The total market opportunity in front of AMZN is very very large. Amazon has demonstrated many times its ability to create new markets. This ability to create new business verticals is one of the hallmarks of highly successful Internet-based businesses. WAB, on the other hand, operates in the traditional railroad market. Growth is finite, potentially at a rate a bit higher than the economy, and there’s not much opportunity to create new business verticals.

I will also add that PE is probably a useless metric for AMZN. The reinvestment into the business keeps driving down the profitability but that seems fine as long as they keep growing their market share and keep finding new verticals. May be P/S is a better metric. Amazon’s P/S is about 2. Google’s is about 5. WMT and COST are about 0.6. The relative valuation on sales basis seems about okay.

Anirban

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I will also add that PE is probably a useless metric for AMZN. The reinvestment into the business keeps driving down the profitability but that seems fine as long as they keep growing their market share and keep finding new verticals. May be P/S is a better metric. Amazon’s P/S is about 2

Sorry anirban, but I think P/S is misleading and useless for AMZN. AMZN is above all a retail company and retail companies work on razor thin margins. While a software company might have margins of 50% of sales, a retail company will have margins of under 5%, so will need at least 10 times as much sales to make the same profit. Looking at P?S is silly. It IS profit that matters.

The reinvestment into the business keeps driving down the profitability but that seems fine as long as they keep growing their market share and keep finding new verticals.

It’s 20 years now and they are still “investing in the business” and not showing a profit. There are plenty of companies that grow the business AND grow their earnings at the same time. Why should I invest in AMZN who can’t seem to figure out how to make any money, when I can invest in one of the others.

Saul

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I don’t think we should even think of comparing AMZN and WAB.

Among other things, one would have done much better in either of them versus being in a lot of other things. It isn’t as if these are the only two stocks we have to choose from or that it would be good to try to pick the one stock to hold forever and nothing else.

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Saul,

Little old WAB. Unloved, unknown, unglamerous. Railroads? Everybody knows you will get very low but steady returns.

Oh really? Wouldn’t we all love to have had the magnificent price appreciation of this company over the past five years? Sometimes I wonder why I don’t just simply just put my entire portfolio in this company. :slight_smile:

Jim

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I do really like this board for the analysis and differing opinions on a lot of stocks.

I have to disagree here with some of the flack some of these high PE companies get.

You can’t completely value companies like NFLX/AMZN/TSLA based on metrics like PE or Price/Sales and the like because they are innovating at such a fast pace that you do not even know what revenue stream you will be getting in the future.

AMZN is not a just retail company, TSLA is not just a car company, NFLX is clearly not just a DVD by mail company anymore. In a lot of these cases people are willing to pay up because these companies have the ability to really create disruptive things that will lead to exponential growth. These are companies to sell when you don’t think they can innovate anymore, but a big key is finding a good entry price into the stock so it does get trickier.

If AMZN had just stayed as a retailer and not invested in so many new avenues, they would be nowhere near where they are today.

If TSLA just tried to be a car manufacturer they would have been bankrupt years ago due to costs.

Companies like WAB & SKX have a ceiling on how fast they can grow, but they do make profits, and are good investments. But in 50 or 100 years, will railroads even still be around?

Even in 10 or 20 years Will WAB be able to transform its business to keep up with technology? Or will SWKS make more components that go into the next evolution of railcars will be with parts and technology made by TSLA that runs on logistics powered by AMZN web services?

It is for sure very interesting, and of course all speculation but that is where the value is coming from, because these companies are reinventing and creating entire new businesses.

Really the argument comes down to do I want companies with only proven profits that are easily predictable or am I will to pay up for more risk to entrust management to create the things I am not seeing in the future.
At some point the AMZN, TSLA, NFLX, TWTR, and a host of other similar companies will be printing growing profits just like SKX and WAB do now. But that will also probably be after a parabolic spike or 2.

Nothing wrong for waiting for them to show you the money before investing. In fact it is very sound. But I do think that both types of companies compliment a portfolio well. Part of the cost of the high growth are the innovative and transformative things that you don’t yet see.

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But in 50 or 100 years, will railroads even still be around?

will many of us still be around to see?

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Hopefully… :slight_smile:

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I have to disagree here with some of the flack some of these high PE companies get.

You can’t completely value companies like NFLX/AMZN/TSLA based on metrics like PE or Price/Sales and the like because they are innovating at such a fast pace that you do not even know what revenue stream you will be getting in the future.

My argument is not so much against the high P/E but against the uncertainty. We have several thousand stocks to pick from, why take the riskiest ones?

But in 50 or 100 years, will railroads even still be around?

At my age I couldn’t care less! I won’t be around. (I wonder how they travel in Heaven and Hell?)

Even in 10 or 20 years Will WAB be able to transform its business to keep up with technology?

It doesn’t matter unless you are a buy and forget investor. Companies and technologies have lifespans and the best part for investing generally is in the middle, after they have proven themselves and before they have exhausted themselves. Think “S” curve!

https://www.google.com/search?client=safari&rls=en&q…

Denny Schlesinger

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AMZN is above all a retail company and retail companies work on razor thin margins.

Not sure if I agree with this completely. AMZN has a WebServices business, AWS: http://aws.amazon.com/
From Wiki: Amazon Web Services is a collection of remote computing services, also called web services, that make up a cloud computing platform offered by Amazon.com. These services are based out of 11 geographical regions across the world. These products are marketed to large and small companies as a service to provide large computing capacity much faster and cheaper than the client company building an actual physical server farm.

Amazon was the pioneer here, they will break out the earnings for this group separately in future earnings statements, since it is very profitable and contributing to the bottomline. From:
http://www.businesscloudnews.com/2015/01/30/amazon-to-pull-c…
This past quarter saw the cloud giant declare $1.67bn in ‘other’ revenue, where the firm has generally lumped AWS and which it has previously said makes up the bulk of that segment. The result is a 43% increase year on year, and up from $1.38bn from Q3, or 23 per cent sequentially.

They tried to enter the cell-phone market but that failed to take off.
This article provides a behind the scene of why it failed:
http://www.fastcompany.com/3039887/under-fire

The news about them using drones for faster delivery has made primetime, but I wonder what else they could use it for and monetize just like they did with AWS.

Kris

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Mike,

Its a timeframe issue here. Some of us are investing with a longer time horizon while some of us are operating on a shorter time horizon. Without a longer time horizon, it would be hard to invest in these disruptors. Big disruptors also keep inventing new markets for growth. And because these are totally new verticals the opportunities are often unknown which brings in the volatility. However, proven management teams time and again create value by creating new opportunities and new markets.

I 'm with you. I think in this board disruptors like AMZN, TSLA, NFLX, TWTR are criticised more than they should be …

Anirban

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We have several thousand stocks to pick from, why take the riskiest ones?

Then why pick KNDI, which I gather has been very good to you (and less spectacularly to me)? Not the riskiest, to be sure, but well beyond the tolerance level of many.

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Then why pick KNDI, which I gather has been very good to you (and less spectacularly to me)? Not the riskiest, to be sure, but well beyond the tolerance level of many.

1.- I didn’t think Kandi was particularly risky, it had a profitable legacy business when it ventured into EVs and the EV business plan was sound unlike the EV plans of most incumbent car makers.

2.- I’m not the many. I’m just me. :wink:

3.- Yes, KNDI has been spectacularly good to me, a six bagger in four years (IRR over 45%). I’ve developed a trading strategy for development stage companies that allows me to accumulate shares while lowering the cost basis. I made 35 trades in KNDI in under four years. It consists basically of taking advantage of the stock’s volatility and it works best with flat-liners which is what KNDI did for two and a half years after I started buying at the end of 2010. I brought my cost basis down to $2.10

http://softwaretimes.com/pics/kndi-04-16-2015.gif

4.- Unfortunately execution has been difficult which has led me to take profits quite aggressively of late but I still have an oversized position but now playing with house money.

Denny Schlesinger

BTW, I think Kandi is riskier today than it was in 2010. In 2010 almost no one had heard of Kandi. Since the middle of 2013 it has had a strong following of bulls, bears, bashers, and shorts. It has invested in a lot of plant capacity but adoption is weaker than I had expected. EV adoption in China is well below government targets despite massive subsidies and incentives.

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AMZN is above all a retail company and retail companies work on razor thin margins.

Not sure if I agree with this completely. AMZN has a WebServices business, AWS: http://aws.amazon.com/
From Wiki: Amazon Web Services is a collection of remote computing services, also called web services, that make up a cloud computing platform offered by Amazon.com. These services are based out of 11 geographical regions across the world. These products are marketed to large and small companies as a service to provide large computing capacity much faster and cheaper than the client company building an actual physical server farm. Amazon was the pioneer here, they will break out the earnings for this group separately in future earnings statements, since it is very profitable and contributing to the bottomline. From:
http://www.businesscloudnews.com/2015/01/30/amazon-to-pull-c……
This past quarter saw the cloud giant declare $1.67bn in ‘other’ revenue, where the firm has generally lumped AWS and which it has previously said makes up the bulk of that segment. The result is a 43% increase year on year, and up from $1.38bn from Q3, or 23 per cent sequentially.

Sorry Kris, and others who think of AMZN in other terms. Amazon IS primarily a RETAIL company. As I read their last quarterly report, their “Other” category, where cloud services are included, makes up 5.9% of their revenues. Now a company with 94% in retail IS primarily a retail company.

Saul

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AMZN is not a just retail company, TSLA is not just a car company… In a lot of these cases people are willing to pay up because these companies have the ability to really create disruptive things that will lead to exponential growth…
If AMZN had just stayed as a retailer and not invested in so many new avenues, they would be nowhere near where they are today.
If TSLA just tried to be a car manufacturer they would have been bankrupt years ago due to costs.

Hi Mike,
Although it’s hidden by all the hype around cloud services, as I just wrote to Kris, Amazon IS primarily a RETAIL company. As I read their last quarterly report, their “Other” category, where cloud services are included, makes up 5.9% of their revenues. Now a company with 94% of their revenue in retail IS primarily a retail company. Let me be clear, I love amazon, the company. I buy everything from kindle books to sneakers from them. I just don’t like the stock as an investment.

As for TSLA, TSLA is a car company! That’s what they make. Cars. That gives them all the limiting factors of a car company. It’s very, VERY, capital intensive! If a software company wants to triple sales it just sells or downloads more copies of its software. For TSLA to triple sales, it has to raise money to build factories, then build them which takes many months to years even, order big machines in advance, install them, run prototypes, test them, etc. Its a CAR COMPANY! Again, I love Tesla the company. It’s just that the stock is priced ridiculously, like a software company (so that even Musk has repeatedly said the stock is overpriced).

Saul

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