![]() But there’s a limit an investor can make when the earnings multiple regresses to the mean. If that eventually adjusts within a year or two, that’s a great trade. Let’s say that you buy a stock at 10 times earnings that should be going for 20 times earnings. If you had paid $3,000 for Amazon and held on to it to today, then you’d have made a huge profit and also outperformed the market by a good margin.īut remember those words I just wrote, “if you held on to it.” For the long-term investor, the stock market is always cheap.Ī value investor is looking to get a cheap stock based on today’s valuation. (Here’s an article I wrote on the 20th anniversary of Amazon’s IPO>) Viewed that way, Blodget’s price target was a bargain-a huge bargain. But what if you didn’t? In the two decades since then, Amazon has grown fantastically. Right? Once the bubble burst, shares of Amazon plunged 95%. Obviously, this was a massive stock bubble. Amazon got over $550 per share in early January (these numbers are not adjusted for splits). It took less than a month for Amazon to reach Blodget’s price target. Wall Street went bonkers and Amazon jumped $46 per share that day. Then things really got crazy! Henry Blodget, a well-known analyst, gave Amazon a $400 price target. By mid-December, it got to $242-3/4 per share. On October 9, 1998, Amazon closed at $86-3/16 (remember those fractions!). Shares of Amazon, in particular, were soaring to the moon. In late 1998, Wall Street was taking notice of these new-fangled Internet stocks. If so, that changes the way we value businesses, and that’s what I want to get at this week. But shouldn’t we concern ourselves with other factors? Perhaps the company’s ability to grow may be its most undervalued asset. It may have a high dividend yield or a low price-to-earnings ratio. The question: What is a good value?Ĭonventionally, it means a stock with generous valuation metrics. This raises a good lesson for investors and it’s something I want to share with you in this issue. Of course, I didn’t know that at the time. In retrospect, why was I stressing so darned much? It seems silly that I was so concerned about a few dollars on a stock that was prepared to rally. Here we are 20 months later and Trex is just over $109 per share. Ultimately, I added it to our Buy List at $44.94 per share. But if it climbed to $47 or higher, then I was apprehensive. ![]() If I could add it at $43 per share, well then that was very good. After running all my calculations, I determined that $45 per share was a good price for Trex. I really liked the business, but I was very concerned about the price. ![]() In late 2019, I was strongly considering adding Trex ( TREX) to our Buy List. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year.) What Makes a Stock a Good Value? (This is the free version of CWS Market Review. Eddy Elfenbein, August 31st, 2021 at 9:18 pm
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