This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why P/E Ratios Are for Losers

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- Check out the standard bear case for stocks ranging from Amazon.com (AMZN - Get Report) to Chipotle Mexican Grill (CMG - Get Report) to Lululemon (LULU - Get Report). For all three, "value" investors argue that the stocks must drop because they sport lofty price-to-earnings ratios. In fact, some folks make this prediction as if it is Newtonian law.

As of Friday's close, AMZN trades at a current P/E of roughly 139 and forward P/E of about 74. CMG clocks in at approximately 62 and 39, respectively, while LULU notches a P/E of 58 in the here and now and 35 looking out one year. These three stocks, with the exception of a few very normal fits and starts, have done nothing but go up. Two-Year, Five-Year Returns

  • AMZN: 30%, 204%
  • CMG: 231%, 535%
  • LULU: 256%, 426%
  • That's quite impressive, yet the bears remain defiant. As a popular talking point, bears compare these three companies (and others with high P/Es) to Netflix (NFLX). They express an unconvincing certainty that what goes up must come down. They blast Jeff Bezos for spending too much, operating on "razor-thin margins" and not collecting sales tax. They wonder how the market could value a burrito joint at such a high "multiple." And they label LULU a passing fad that sells overpriced clothing to a fickle set of bored housewives. Rarely will AMZN, CMG and LULU bears listen to more holistic arguments about long-term opportunities, sound and sustainable business plans and brand loyalty between company and relatively high-end consumer.

    If they listened to these and other more complex points, AMZN, CMG and LULU bears would stop using NFLX as a case study.

    As I noted in a recent article , Amazon.com has been spending "too much" for more than a decade. Because I've covered AMZN thoroughly there and elsewhere, I focus on CMG and LULU in this article.

    Both companies target a relatively affluent consumer. LULU appears to trend higher end, but, without a doubt, both largely serve the upper middle-class and higher sets who make Chipotle meals a habit and drop $100 on yoga pants on a regular basis. In different ways, Chipotle and Lululemon build brand loyalty with their core groups.

    1 of 3

    Check Out Our Best Services for Investors

    Action Alerts PLUS

    Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    Quant Ratings

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    Stocks Under $10

    David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    14-Days Free
    Only $9.95
    14-Days Free
    To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
    Submit an article to us!
    SYM TRADE IT LAST %CHG
    AMZN $389.51 0.00%
    CMG $686.93 0.00%
    LULU $66.19 0.00%
    AAPL $127.60 0.00%
    FB $83.09 0.00%

    Markets

    DOW 18,034.93 +208.63 1.17%
    S&P 500 2,100.40 +19.22 0.92%
    NASDAQ 4,994.6020 +62.7870 1.27%

    Partners Compare Online Brokers

    Free Reports

    Top Rated Stocks Top Rated Funds Top Rated ETFs