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NEW YORK ( TheStreet) -- Beauty is in the eye of the beholder. In the stock market, the term "value" is one of the words that essentially models that same description -- that is to say, it depends on who is doing the judging.
A glass of water might conjure a host of different meanings from half-full to half-empty or even the idea that it might be time to short water and go long on glassware. Still, the reality is that which makes up valuation is all relative.
In this article, we are going to discuss a few stocks that are constantly in the forefront of the valuation discussion and try to answer the prevailing question of whether or not stocks always reflect a company's underlying value.
We are going to look at four names:
Apple(AAPL - Get Report),
Facebook(FB - Get Report),
Amazon(AMZN - Get Report) and
Salesforce.com(CRM - Get Report). We will try to determine the source of the mistake that investors continue to make -- confusing "price" with "value," two entirely separate things.
Do Valuations Really Matter?
Warren Buffett has always reminded us that "price" is what you pay and "value" is what you get. However, that has not always been reflected in how stocks are bought and sold.
The perfect example of this is Apple when compared to Amazon, Facebook and Salesforce.com, all three sporting much higher price-to-earnings ratios. What this tells me is that if the market was efficient or if "all things were equal," Apple should be trading at least in the $1,200s by now.
However, as it stands Apple remains the cheapest stock on the market when assessing not only its current fundamentals, but its forward-looking potential.
Consider this: Over the past five years Amazon has had the label of being one of the most expensive stocks on the market and has never averaged a P/E of less than 80 during that span. The stock can't stop making new highs.
Yet, Apple, as the largest company in the world, with a cash hoard that makes the U.S. Treasury envious, can't seem to trade higher than a multiple of 17. It gets even more outrageous when one compares Apple to Salesforce.com, a company that trades at a price-to-earnings ratio that is literally off the charts. However, Salesforce is not profitable.