We have a discussion on how expensive is Netflix. LinkedIn could be more obvious than Netflix. Here are my thoughts.
* Reward / Risk ratio. If the probability is the same to move up a stock by 30% and move it down 50%, it is overvalued by 20%.
* The current P/E is 60 and the average for last 5 years is 30. Most likely it is overvalued by 50%. P in P/E is usually the expected earning. It is better fit to predict the future performance of a stock in general than the past data which is 100% accurate.
P/E has better meaning and easier for comparison such as to bank CD rate or AAA Treasury Bill if it is reversed E/P (i.e. earning yield EY). In addition, you do not have to consider negative earning in searching stocks.
* The fools who do not learn from the high P/E stocks in 2000 will part their money fast.
* When the market favors momentum (vs value), it is ok to buy stocks with prices higher than the intrinsic values by a small percentage. In long term, the prices will come back close to their intrinsic values.
* Buying such an expensive stock is like buying a hot dog cart in NYC for $100,000. He will sell many hot dogs, but the return of the investment is peanuts.
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Shorting is risky.
You cannot short in retirement accounts. Even with the best analysis in shorting Netflix, you can still lose a lot of money. You can lose more than 100% esp. when the herd is your opposite side. You need to pay cost borrowing the stock and the dividends.
(c) TonyP4 12/25/2010
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Disclaimer: All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.
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