I've had some outside business to attend to today, which is just as well, because I'm sure having a tough time finding any new ideas. We obviously have strong momentum and are becoming a bit extended, but I'm not adverse to making some buys, if I can find things with decent entry points that aren't too expensive.
Big-cap buyers seem to be happy to pay up for stocks that are trading with PE's that are double their earnings growth. I assume they feel that the earnings stream will be secure, and therefore, that isn't an unreasonable valuation, but I will seldom pay that much for any stock, particularly a smaller cap.
Ideally, I want to see the inverse of that matrix. I want to see growth that is twice the P/E ratio. A good example is P.H. Glatfelter (GLT - commentary - Cramer's Take), which I mentioned Thursday. The stock has a trailing P/E of 28, but is expected to grow earnings 69% to 93 cents in 2007 and another 48% to 1.38 in 2008. Compare that to a Coke (KO - commentary - Cramer's Take), which trades with a P/E of 21 and is expected to grow earnings 10% each of the next two years.
GLT is somewhat cyclical because it is in the paper industry, and KO is likely to be more consistent, but the valuation difference is huge. I feel much more comfortable with a stock that has the protection of a favorable P/E-to-growth ratio. Unfortunately, it is becoming tougher and tougher to find.
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Rev Shark Blog Watch for This Small-Cap Scenario 4/20/2007 8:36 AM EDT As small-caps lag the big boys, you could get an opportunity when they play catch-up.
Rev Shark Blog Broader Buying Needed 4/19/2007 4:28 PM EDT It can't be all big-caps.
Rev Shark Blog Breadth Strong; Chips, Small-Caps a Concern 4/20/2007 12:31 PM EDT The major indices have momentum, but the relative weakness in small stocks is a warning sign.
At the time of publication, De Porre was long GLT, although holdings can change at any time.
James "Rev Shark" De Porre is the founder and CEO of Shark Asset Management, an SEC-registered investment advisory firm. He also operates sharkinvesting.com, an interactive online community that serves and educates active investors. De Porre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children.Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here to send him an email.
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