What It Really Means to Sell at 100 Times Earnings

In this uncertain world, an investor's alternatives are vast. Thousands of stocks, thousands of mutual funds and thousands of more esoteric investment options vie for investors' money. By taking their present course, most investors assume what they have chosen is superior. I would guess there is an awful lot of Nasdaq trading that would not even go this deep in logic, but we've been there before, so let's move on.

What does it mean to pay 100 times earnings or more for a stock? In a prior piece on Amazon.com (AMZN Quote), I discussed why a discounted cash flow model -- which underpins most of my investment decisions -- is conceptually the correct tool to value companies whose clarity will not be determined until a much later date. So, for today's column, I will ignore the 136 companies that had $1 billion market caps and less than $25 million in revenue in their last fiscal quarter and stick to companies with reported earnings.

Let's take Cisco (CSCO Quote) as an example. Even the most Jim Grant-like observer has to admit that Cisco management has done an excellent job of recognizing the growth of the bandwidth market. The company has improved employees, products and services to a level that is truly breathtaking. ...