When a stock is selling at a PE ratio of 30, nobody can argue: it's expensive.
When is it too expensive VS just... expensive?
Here's what I think:
There's 3 types of expensive stocks:
1- The stocks that haven't proved nothing yet but
for which there's a lot of excitation. Most of these companies never
made any profit, or a very small profit. There's no garantee that the
stock will make money in the future. We're talking about marijuana
stocks, some techno stocks (stuff like Snapchat and Twitter), anything with a crazy hype.
2- The pharma stocks. I really liked these stocks
in the past. That was my favorite sector. Now, not so much. I've came
to understand that everything is very unstable with these stocks.
They're very sensible to politics, to some scandals (a drug sold for too
much, an expired patent, a new promising patent finally going
nowhere…). So, there's some speculation with these stocks. Some of these
stocks may be selling for 30 times current earnings today but they may easily drop
to 15 times earnings overnight because of some political
announcments.
3- The traditional business in expansion. We're
talking here about Buffalo Wild Wings, Texas Roadhouse, Five Below,
Dollarama, Ulta Beauty, MTY Food Group, Carmax, and many others. That
category of stock does something very simple: it replicates a model that works, over and over. If
100 stores produce 100 million dollars, we could predict that 200 stores
would produce 200 million dollars. There's nothing else (almost) to
consider. Usually, these stocks are always expensive but their PE ratio stays at a steady level. These expensive stocks are less expensive
than the 2 precedent categories because they usually retain their value in the long run.
If I'd understood that 5 years ago, I'd be much richer now.
Better late than never.
...
Now that I think about it, there's probably many other categories. Otherwise, where could I put Visa and Mastercard?
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RépondreSupprimerAnyone bought Dollorama stock today?
RépondreSupprimerYes I bought a few more shares of Dollarama yesterday. Hallowe'en, Christmas and of course WINTER is coming.
RépondreSupprimerReally excellent and nuanced article on the different kinds of expensive stocks. Merci de partager votre sagesse avec nous.
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