It’s Not Enough To Like A Company, It’s All About Valuation (AMZN, LNKD)

By: ispeculatornew
Date posted: 02.03.2012 (5:00 am) | Write a Comment  (0 Comments)

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I’m sure you’ve heard such things before:

“Look for companies that you know and do business, look at how well they are doing and then make stock purchases on that basis”

It’s Insane To Think In Such A Simple Manner

Investing is NOT easy, it really isn’t. If you are looking for a clear method to make good stock picks, then dividend investing might be the right thing for you. Again, you would not be judging the company based on how many friends you know that shop at the local store or how good of a service you get every time you visit. I’m not saying that it’s irrelevant… ok maybe I am.

If All You Needed Is To Find Companies That You Liked, Life Would Be Easier

Take two companies that I’ve been praising over and over, Amazon (AMZN) and LinkedIn (LNKD), not only do I know both companies well but:

-I use them on a weekly basis
-So do most of my friends and family
-We would pretty much all have great things to say about our experiences working with AMZN and LNKD
-I love their business not only from the consumer point of view but also from the investors perspective. Why? These companies will end up making tons of revenues and profits in the coming years and totally dominate their markets
-I would love nothing more than to call myself a shareholder of these names

But I’m Not Pulling The Trigger because…

Everything Has A Price…..

In my opinion, investing is all about valuations. Dividend investing takes a slightly different perspective but even that incorporates valuations to a large degree. Buying stocks based on how well the business seems to be doing is insane.

Take Amazon. The company does TONS of business, sells products more than almost any other retailer, at very low prices. It is also spending millions reinvesting into its business through shipping centers, new digital products, etc. All of those will end up paying, I’m 100% convinced about that. But is Amazon a big bargain at its 100+ P/E ratio? Honestly, I’m not even sure it’s a decent price, it probably isn’t. At some point, Amazon will be able to diminish its investment level which will help margins a great deal. That could take some time though.

As for LinkedIn, I think the company has incredible upside, it will most certainly take the place of companies such as MonsterWorldwide (MWW) in the near to medium term future. That being said, it’s P/E ratio for next year is over 100….

They Both Have Upside

I would be fearful of shorting either of these companies. I was asked on yesterday if I regretted not being short Amazon (AMZN) going into its earnings (stock ended up tanking after very disappointing results and outlook). My answer? “Not at all”. I could not short Amazon or LinkedIn. They both could easily explode and turn out to be great investments or terrible shorts.. I like to think I’ve learned my lesson.

Caution Ahead

So why not buy a stock that could explode? Because it’s all about probabilities. In both of these cases, I think that while the stock could explode, there is an even bigger possibility that LNKD and AMZN will end up going down. They are valued for such strong growth that anything short of “exceptional” will mean losses for those shareholders. Exceptional might happen and I hope it does for those 2… but I’m not putting money behind it.

Can you relate any way? Have you heard some friends or family that bought stocks for reasons that had nothing to do with valuations?

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