The One Reason Never To Fear Buying a Stock at All-Time Highs Again
It happens like clockwork…
Every time the markets tap new highs, I get asked by nervous investors if they should buy stocks.
My answer is always the same.
But only if this one condition holds true.
This Stock Could Turn Every $1 Invested into $6.28 Million (Again)
Let’s take a quick trip down memory lane as a means of setting the stage.
I can’t tell you how many people I heard from back in 1999 who said that stocks were “expensive,” there was “nothing to buy,” and that stocks were extremely overvalued.
All of which are sentiments you hear today under very similar circumstances. So much so, in fact, that the headlines we saw back then are almost interchangeable with those we see now.
The markets had enjoyed a healthy run that people feared was over. Huge changes in our economy were underway. And, last but not least, the war in Kosovo was in full swing as Serbian soldiers forced nearly a million ethnic Albanians from their homes… and worse.
Just yesterday the markets touched new highs yet again. The economy appears to be growing, earnings are on the mend and the future is arguably brighter than it has been in years. And, once again, yet another “hot war” looms.
I wouldn’t hold it against you if you wanted to run for the hills or bury your head in the sand like an ostrich with a sign on your rear end saying “kick me when it’s over.” Just make sure you understand the irony of your actions if you do. To borrow an old expression, the more things change, the more they stay the same.
That sounds trite but what I want you to understand is that there is no more difficult time to invest than in a market that’s doing very well for the hesitant or the uncertain.
Take Altria Group Inc. (NYSE:MO), for example.
The company was trading at or near all-time highs of $53 per share 18 years ago which made it very “expensive” compared to other stocks. At the same time, legions of investors caught up in the excitement of the dot.com era found it boring. “Like watching paint dry” was a characterization I heard more than once from dollar-struck people enamored with the likes of Pets.com and Webvan.
Yet, Altria had a rock solid business model and was tapped into the Unstoppable Trends we follow day in and day out around here.
Not only did this give the company huge profit potential, but it gave those very same investors the thing they craved most – the potential for huge returns, high current income and stability.
Since then, the stock has returned 1,589%, earnings have grown by 1,712%, and yield is still a rock solid 3.3% that’s grown by 58%. So much for the ‘ol things are expensive argument, don’t you think?
Today, I hear shades of the same thinking from thousands of concerned investors, especially when it comes to the big tech companies we talk about frequently.
For example, Amazon Inc. (NasdaqGS:AMZN) trades at a PE of 185, and Facebook Inc. (NasdaqGS:FB) trades at a PE of 290. By conventional metrics, both are extremely expensive.
Only neither is a conventional company which is why conventional metrics often used to judge overall market conditions and the relative attractiveness of specific stocks don’t apply. Research, in fact, shows that PE ratios have very little predictive value when it comes to identifying the most successful investments.
For that, you’ve got to look forward to Unstoppable Trends, to a company’s products, to its competitive position and to its customers.
Both of these companies can add a million customers at a click of a button, or merely releasing a few lines of code. That means they can grow into the P – Price – while expanding the E – earnings.
What’s more, they can do that no matter who’s in the White House, no matter who’s in Congress, no matter whether Wall Street is muzzled or not. That, in turn, means they’re scaleable and potentially worth hundreds of billions of dollars more then they are today.
That’s what most investors are missing.
They’re so concerned with judging specific stocks by specific metrics that they fail to take in consideration the very real possibility that they may not apply in today’s markets.
Let me give you another example that’ll help put this in context.
Take a car maker – any car maker.
They make a 4-wheeled contraption that hasn’t changed since Karl Benz introduced his horseless carriage in 1885 – 132 years ago. What they sell is limited by what they produce so the PE ratio which measures a given stock’s price in relation to its earnings still applies.
You can argue that they can boost revenues by fancy financing, changing their R&D or even reducing expenses. I would argue that they’re still limited by the number of cars they can produce and sell to a finite customer base at the end of the day.
Remember, PE ratios don’t account for growth nor do they reflect the quality of earnings.
Many public companies can manipulate earnings (and do) in pursuit of higher stock prices. For instance, many publicly traded manufacturing companies boost their earnings by boosting their accounts receivable and counting them as “sales” even though there has been no value created and no related cash flow.
What matters – and what I want you to understand – is that most investors fear buying something that’s expensive because they cannot justify it using metrics that are based on the past And, instead, of reconciling why that may not be the best course of action they give up.
Perma-bears don’t help.
Every time the markets hit new highs they come out to offer sage commentary and all sorts of rational for their thinking…which usually comes down to some variation of “it’s expensive.” The unwritten implication, of course, is that the markets are ripe for a fall and you’d be a fool not to listen.
Nouriel Roubini started calling for a massive market crash in 2005 and he got one… three years later… which means he missed the run up. And the correction… and another run up.
You may recall the name Howard Ruff. He wrote a bestseller called How to Prosper During the Coming Bad Years and published it in 1979, right before one of the biggest bull runs in history. In February 2009 he surfaced again with alarmingly bearish commentary…exactly one month before the markets began a legendary triple digit run up.
Now there’s a new raft of folks cautioning against new highs merely because they fear new lows… and, of course, because stocks are “expensive.”
Only thing is, truly great stocks are never expensive because they can grow into earnings.
…at the click of a mouse.
…over long periods of time.
…when market dominance means more than traditional business.
…when customers must have what they make.
Until next time,