Yes Virginia, P/E ratios still matter
Two days ago I wrote a piece trying to justify how Amazon could have a P/E ratio 16x higher than Apple. In short, I couldn’t. Recently Rocco Pendola wrote a piece which says P/E ratios don’t mean much, instead good management does (a paraphrase). He says, “This is not your Grandfather's stock market.”
And it seems he is correct. His article is actually titled “Sell Amazon, Buy Apple,” the exact opposite advice I gave.
But then again, I remember hearing for 3-4 years in the late nineties that profits don’t matter for public companies because if you have earnings you can then have a P/E ratio assigned to you. Ludicrous right? But it seemed the entire financial and tech community was convinced the rules had changed and earnings no longer mattered. They were right until most every investor who believed this lost almost everything.
Today, Robert Weinstein writes you should Buy Apple & Sprint while shorting Amazon. He believes the reason Apple is not trading higher has to do with the retail investor who can’t stomach stock prices which are sky high.
Here is a salient excerpt from his piece:
Amazon has a nosebleed trailing 12-month P/E of 185. That means that based on the results of the past 12 months, it will take 185 years of operation to produce enough profit to equal the cost of a share.
I am not a financial analyst – but P/E ratios seem like a fundamental tool investors use to make investments over time. Sure there can be dislocations for a while but it would seem over time, the value of any enterprise will be based on its earnings over time.
Disclosure: I have owned Apple shares for a while and have no plans at this moment to short Amazon – where I am a more than loyal customer