GUALFIN, ARGENTINA – Yesterday, an amazing storm blew up.
The wind gusted up so much dust, we could barely see 10 feet in front of us. Dark clouds rushed overhead.
Rain… rain!… came down in drops the size of coffee cups. Up in the mountains, light snow covered the peaks.
The storm swept in just as we were getting in our pickup to drive down to the lower valley.
We moved on a doctor’s suggestion. The 1,000 feet of elevation (not altitude; a dear reader corrected us) makes a difference.
At 8,000 feet above sea level, in our casita near the vineyard, we sleep like a baby. At 9,000 feet, we don’t sleep at all.
The main ranch house is on a windblown prairie between two mountain ranges.
This time of year, the wind howls, beginning in the afternoon and continuing through the night.
“The wind blows the air away,” say the locals. It doesn’t make much sense. But there might be something to it.
The casita – barely 400 square feet – is in a cozy valley with less wind, less cold, and less dust. You can see a bit of what it looks like through our glass wall.
The view from Bill’s casita down in the valley
Yesterday, we watched our favorite stock – the “River of No Returns,” Amazon.com.
We expected it to close over $1,000. It ended up $7 short. The proximate cause of this remarkable run was its latest earnings report. Amazon earned $1.48 per share in the first quarter.
How much should a stock like that be worth?
We’ve bought a number of businesses over the years; it has almost become routine.
We have a formula we apply to new business acquisitions as well as sales between partners, stakeholders, and other insiders.
Generally, we take the last three years of earnings, average them out, and multiply by four. That’s right: four. A retiring partner, for example, may sell his stake back to the company for four times earnings.
“You buy companies for a price-to-earnings [P/E] ratio of just four?” we hear you gasp.
Yesterday, Amazon shares traded at 185 times earnings. On average, the large, well-established companies listed on the S&P 500 sell for earnings multiples of 26.
How comes it to be that we can buy companies for just four times earnings? And what is a company really worth… when P/E ratios vary from four to 185?
Part of the explanation for the wide gap is the difference between large public companies and small private ones.
The large ones have large public markets; it is easy to buy and sell shares. They are well-researched and regarded as safer than small startups. So pension funds and large investors can buy them.
Also, public companies are part of the public spectacle. They are to the investment world what public information is to the intellectual world. They’re in the news. They’re mainstream.
It’s always better to be conventionally dumb than unconventionally smart. You won’t embarrass yourself by being outraged by Trump’s budget proposals… or by buying Amazon.
And if you’re a professional money manager, it won’t damage your career. Everybody knows it’s the right thing to do. And now that Amazon’s shares have gone up so much, everybody knows they will go up even more.
Here… in Investor’s Business Daily… we see the careful, analytical minds at work:
Jefferies analyst Brian Fitzgerald hiked his price target on Amazon shares to 1,150 from 975 and maintained a buy rating.
“In our view, Amazon remains a core e-commerce holding, one of the best large-cap ideas in our coverage universe, with plenty of growth opportunities ahead,” Fitzgerald wrote.
RBC Capital Markets analyst Mark Mahaney raised his price target on Amazon to 1,100 from 900 and maintained a buy rating.
Investing in private companies, on the other hand, requires private knowledge. You can’t do what everybody else does. And you can’t think what everybody else thinks.
There is no public research readily available… nor any public opinion to tell you what to make of it. You have to figure it out yourself.
In our little niche of the financial publishing business, there are few people willing or able to do the work involved. This leaves sellers with few options.
Also, sellers typically want to get out because they’ve run into some trouble. Time, money, health issues, divorce. Often, they are well-motivated to sell.
And a knowledgeable buyer may be able to solve those problems and make the business much more successful. A seller often hopes the buyer will be able to make the business worth more… and share the gains with him.
A seller also often retains an interest and becomes a partner. Or he asks for payments staggered over a number of years… based on the same formula… so he can benefit from whatever skill, luck, or money the buyer puts into it.
On the other hand, small companies come with additional risks – especially troubled companies. Records are often poor. Analysis is often incorrect. Management is often missing.
Sometimes, the business model just doesn’t work. And a buyer, who thinks he can solve these problems, is frequently proven wrong.
Of all the companies we’ve bought over the last 38 years, probably half have failed.
In this light, you may say we paid the equivalent of eight times earnings per successful purchase, which seems more reasonable.
Amazon has been around for more than 20 years. Its management must be decent. There are no secrets in its accounts. It is profitable. It is not likely to fail.
So what’s Amazon worth?
Let’s apply the formula. Our price target for Amazon: $6 of annual earnings x 8 = $48.
P.S. Monday is Memorial Day. But please check your email. We have some photos of our little valley to show you… and of the people who work here. We’d also like to give you the inside scoop on our wine business… and make you the most unusual offer ever made in the wine industry. Try our wine completely at our risk… You can place an order here.
BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners
Don’t fall victim to “equity home bias.”
That’s the tendency for people to invest in stocks listed in the country where they live… and ignore opportunities in foreign markets.
Since the start of this year, the S&P 500 is up 7%.
Not too shabby…
But it’s chicken feed compared to the gains on offer in Europe, where stocks are soaring.
As you can see, so far in 2017, Italian stocks are up 16%, German stocks are up 17%, French stocks are up 19%, and Spanish stocks are up 25%.
Each of these European stock markets has more than doubled the return of the S&P 500 year to date.
Will Europe’s winning streak continue?
Valuations certainly favor Europe right now.
The cyclically adjusted price-to-earnings ratio, or CAPE ratio, compares stock prices with real earnings over the last 10 years.
The ratio for U.S. stocks is 30. For European stocks, it’s just 17 – almost half as much.
— Chris Lowe
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FAANG refers to Facebook, Apple, Amazon, Netflix, and Google. All these companies have shot up more than 30% in 2017. But with soaring valuations on these tech stocks, some investors fear a bubble is forming.
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After hitting a new high of $2,754 yesterday, bitcoin is now up 129% in 2017. Our colleague Teeka Tiwari explains why you need to pay attention to the emerging cryptocurrency market.
Hedge Funds Are Fleeing the Big Cities
Hedge funds traditionally flock to bustling neighborhoods in big cities. But with soaring rent prices in New York and London, funds are starting to look elsewhere to set up shop.
In today’s mailbag, Bill’s Thursday Diary, “Gold Beats Buffett,” has gotten some readers thinking…
Your comment about the Trump budget leaves me confused. You and Stockman complain that the swamp critters will not let this pass. Yet, by your own description, this budget is exactly what the swamp critters want. They want less money given to the unproductive in order to encourage them to work harder, they want more money given to the rich to reward them for their contributions. And they want more money given to the military to protect the wealth the rich have acquired.
Nothing about the budget solves the basic problem both you and Stockman complain about, i.e. the debt and the inefficient use of resources. Like Trump himself, this budget is an incompetent and corrupt effort to achieve what is now impossible.
– Edmund S.
I have owned both gold and stock in Berkshire Hathaway (BRK). In 1971, when gold was first allowed to trade “freely”, gold was $35/oz and BRK about $38/share. Today gold is about $1,250 and BRK is about $250,000. Gold will outperform currencies, but not a well-run business.
– Charles E.
Meanwhile, readers propose diagnoses for Bill’s recent health scare…
About your heart… Hyperventilation can also cause the same symptoms of feeling you are having a heart attack. Also, if you drink a lot of coffee and alcohol they can cause magnesium (Mg) deficiency… Mg is a muscle contractor and the heart is a big muscle. Most of us are deficient in magnesium… You could try a powder form of Mg before bed to ramp up your levels.
Wishing you the best happy and healthy heart ever! Que te vaya bien.
– Mary H.
Sorry to hear about your trouble and even sorrier that I took so long to comment. It sounds to me like you might have had an episode of Atrial Fibrillation. Not uncommon, especially as you get older. Luckily it is not life threatening, but surely scary the first time it happens. Hard to diagnose, because when you finally get to the Dr. to have testing done, your heart has gone back to Normal Sinus Rhythm and your heart checks out just fine. Millions of us live with the condition, a pain in the tail, but not fatal.
– Richard W.
Last night, one of Bill’s top analysts, Chris Mayer, hosted a free webinar. Anybody who attended learned about Chris’s “Mayer Method” – his system for picking stocks with the potential to double or even triple in under a year.
Late last year, Chris used this method to help his subscribers pinpoint a stock that shot up 100% in six months. If you missed the webinar, you can still learn Chris’s investing strategy by watching this brief presentation.