Tags: Stock | buy | PE | invest

Loving a Company vs Investing In One

By    |   Monday, 15 December 2014 07:41 AM

Sometimes people think that if they love a company, it's worthy of investment. In fact, not only do they think this with companies, but they also think this about countries too.

For instance, this past week, I was on a Q&A panel at Newsmax's Economic Forum in New York City. While answering questions, a woman in the audience said of the panel, "It sounds like you hate America." (That was in response to some words of caution we gave against investing in the U.S. stock market averages right now).

She confused our thoughts on investing with our love or what she thought was a lack of it, for our country.

I love America every day. There's not a day that goes by where I don't love this country. However, that doesn't mean that every day is a day to invest in U.S. stocks via the S&P 500, for instance.

You see, there are times when those companies are cheap and it's time to gobble up some shares, and there are times when those companies within the stock index are expensive and therefore it's time to stay away from them. So that's an assessment, not a change in my love for the company.

I said to the woman, "What if I decided that I was going to eat cupcakes every day for the next year? Would you think I'd be fatter at the end of that year? Well, why in the world would you be so negative on me?"

The point is, it's nothing personal. It's an observation. Our nation's stocks are very high priced right now, and our nation is stacking up debt at a faster pace than ever before. Now, I can love my country as much as I want to, and it's still not going to change those facts.

And so it is with companies too. If you love a company, buy its product or use its services. But don't confuse that with it being prudent to invest in it.

I know you've heard people on TV tell you, "Invest in what you love." I'll be honest with you. I've invested in companies that I didn't like at all, but they were at super cheap fundamental valuations, so I invested. Why? It was prudent to do so, with my money.

So going back to the Q&A panel . . . I told the audience that I'd be willing to drive a Tesla sports car. I like the look and pick-up of the car. So I'd be a customer (if they were cheaper . . . I'm too cheap to buy one). But I'd not be an investor. Why?

The company hasn't made any money. With so many companies to pick from in the world that DO make money, why would I invest in one that doesn't make money?

Oh, but next year, they're projected to make money. And that's true. They MIGHT make their first profit next year. However, the stock trades at a forward (projected) price-earnings (P/E) ratio of 75.

So I could buy stocks like we buy in the Ultimate Wealth Report for cheap P/Es of 6 to 12 (the cheaper the P/E, the better value) or I could buy the overall market via the S&P 500, which has a P/E of 20. Or I could lose my mind and pay 75 times in price for the projected earnings of the company next year.

I gave the audience another example. I told them that I love Amazon.com . . . as a customer. Heck, it's a man's way to shop. I can price shop online and find the best product for the price, then click to buy it and have it shipped to my door (many times for no shipping costs). What man doesn't love that? They didn't have to spend hours at the mall and pay a higher price because it was in the mall. Instead, they can simply go to their front door in a few days and their product is there!

So I love the concept and I'm a customer. So why wouldn't I invest in Amazon.com since I "love" it so much? It's not worthy of my investing dollars. Why?

Amazon.com made no money last year. They had no earnings. Yes, next year, they are projected to earn some money. However, the stock price is so high that it's got a P/E of 347! So that would mean I'm paying 347 times its earnings, which MIGHT happen. Even if it happened just as they projected, this P/E is one of the priciest in the entire stock market.

Picture it this way. What if I told you that you could buy a hamburger restaurant down the road from you that made $100,000 per year in earnings for $500,000. The price relative to the earnings would be a P/E of 5.

OR you could buy another hamburger restaurant down the road that doesn't make any money this year but is projected to make money next year. However, next year it's going to make $10,000. And you could buy it for just under $3.5 million dollars (a P/E of 347). Which are you going to buy?

You might never get your initial capital back out of the latter investment, but with the former investment, you could get your money back out of the business in five years and everything after that is "gravy".

But hey, if you like the burgers better from the place that doesn't make any money, go buy their burger and enjoy it. But don't invest in the company by buying the company.

And so it goes with companies traded via the stock market. Buy the ones that make fundamental sense, but only be "the customer" of companies that you like that don't make fundamental sense.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
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Sometimes people think that if they love a company, it's worthy of investment. In fact, not only do they think this with companies, but they also think this about countries too.
Stock, buy, PE, invest
Monday, 15 December 2014 07:41 AM
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