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, it's that last element -- valuation -- that's
often the toughest taco to crack. Some companies never look cheap,
after all, while 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
Take, for example, Research In Motion (Nasdaq: RIMM) and Google (Nasdaq: GOOG).
The former has more than doubled over the past three months, while the
latter has racked up a gain of nearly 40% year to date. Yet sneaking a
peek at this illustration of recent history
should be instructive for folks who may currently own either company's
shares, as well as Fools who may be considering a purchase.
Yikes, that's a long way down. But, to be fair, that kind of
rearview analysis always begs the question of whether investors could
have -- or should have -- seen writing on the wall. My take: Perhaps
not, but if they'd tuned into each firm's valuation, savvy investors
might have gotten an early warning. Shortly before its slide began,
after all, 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.
Bottom line: Be afraid of these stocks, be very afraid. When an
all-but-inevitable market pullback arrives, they are sitting -- or in
this case flying -- ducks.
Good company, lousy investment
Genzyme (Nasdaq: GENZ) and Teva Pharmaceutical (Nasdaq: TEVA) look priced to fall just now, too.
Make no mistake. Like Google and RIMM, these are fine businesses;
their stocks are just not finely priced. Indeed, their P/Es currently
sail past both the broader market's and each company's respective
industry average. From my cheapskate's perspective, that makes the
downside risk of dreaded "multiple compression" just too great,
particularly when long-haul overachievers like Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP) are still available at bargain-basement prices, comparatively speaking.
And if those cash-cow gushers aren't the 'droids you're looking for
-- and if you're really focused on finding health-care heavyweights
whose forward-looking prospects are downright forceful -- place Amgen (Nasdaq: AMGN)
on your prospects list, Obi Wan. It's a very financially, um, healthy
company, one that's trading at much more attractive levels than either
Genzyme or Teva.
The Foolish bottom line
To be sure,
there's more to uncovering values than just parsing price multiples.
Indeed, separating the wheat from the proverbial chaff -- i.e., stocks
that merely look cheap -- is a full-time job.
If you'd like some assistance when it comes to avoiding value traps, be sure to check out the Fool's Inside Value service, where the emphasis is squarely on rock-solid companies trading for a song. Click here and you'll have 30 no-risk days to decide if Inside Value is for you. There's no obligation to subscribe and your guest pass is absolutely free. Give it a go now.
Already subscribe to Inside Value? Log in at the top of this page.
Shannon Zimmerman
runs point on the Fool's Ready-Made Millionaire and Duke Street services and doesn't own any of the companies mentioned. Google is a Motley Fool Rule Breakers recommendation. You can check out the Fool's strict disclosure policy by clicking right here.
© 2009 UCLICK L.L.C.
Post new comment