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More Expensive Than GoogleBy
Monday, January 16, 2006
You might not think it’s possible, but it is... At over $450 a share, Google (NYSE: GOOG) grabs all the headlines as the world’s most overpriced big stock. But there is another large stock out there, in a similar business, that’s even more expensive than Google... And I have a great way to make some money from this one. This stock is not only more expensive than Google on a price-to-book value basis, it’s actually twice as expensive as eBay (NYSE: EBAY) and Yahoo! (NYSE: YHOO). Even more ridiculous to me, this stock is trading at over ten times sales. At ten times sales, a company would have to pay out every penny of revenue for ten years for the shareholders just to break even. At that price, the folks owning these shares have clearly suspended their belief in reality. I plan on traveling to India next month. I plan on visiting where this company is headquartered, Bangalore, to see what all the hubbub is about. Can this company possibly live up to the hype of being more expensive than Google? I really don’t think so... People obviously think that this stock – India’s outsourcing specialist Infosys (NSE: INFY) – is invincible. They believe it can't fall. Yet the stock actually fell by over 90% in just 18 months not that long ago... from March 2000 to September 2001. It can definitely fall. Why could anyone even imagine paying 10 times sales or more for a stock? I can’t see it, and I wouldn’t do it. But here’s an example of one that people are willing to buy... eBay. eBay has a business without much competition. But is that worth 15 times sales? That’s what the stock currently sells for. I can at least I can see eBay's business "moat” - its lack of competition. But I’m not a buyer of eBay stock. When it comes to Infosys, I simply don't see the business "moat" that makes Infosys twice as expensive as eBay on a price-to-book value basis – it makes it more expensive than the world’s most expensive stocks. Take a look:
As you can see, on a price-to-book value basis, Infosys is the most expensive of all. Infosys is in the outsourcing business. If you're a big business and you want to do something on computers cheaper than you can in the U.S., you call Infosys. Infosys is the best, and that's why its shares are so expensive. However, Infosys is no eBay... it has real competition. Infosys faces tough competition locally, including NYSE-traded Wipro (WIT). It also faces competition from outsiders in India... outsiders like IBM and Accenture (IBM already has 25,000 employees in India). Also, India faces price competition from the Philippines and Eastern Europe, where there are skilled English speakers willing to do the same jobs inexpensively. In sum, Infosys has local competition... It has foreign competition locally (like IBM)... And it has competition from other countries as well. Where's the eBay-like moat for Infosys that makes it worth 10+ times sales? I don't see it. It’s time to bet against Infosys now... Readers of my service Sjuggerud Confidential have already placed their bets. But DailyWealth readers are lucky here... the share price is in about the same place as when I recommended it to my Sjuggerud Confidentialsubscribers. I think now is still a good time to bet against the company. Earlier this week, shares of Infosys tanked after it announced earnings that any other company would be proud of. Said simply, when good results turn out to be bad for the stock price, it’s time to get out of the stock... or even go short. Here’s what I told my Sjuggerud Confidential readers a few months ago. The advice still stands for you today:
Just in case this trade moves against us, I added:
Let me be clear about one thing... This is not a bet against India, or outsourcing, or any of that. It’s simply a bet against a wildly overpriced stock that is starting to break down. It’s a bet that this Indian company with competition on all fronts does not deserve to be twice as expensive as eBay. As for Google? We’ll talk about that tomorrow... Good investing, Steve Market Notes
GOLD STOCKS: DUE FOR A BREATHER?
If the past four months have been happy hour for owners of gold bullion, they’ve been an all-night bender for owners of gold stocks like Newmont (NEM) and Goldcorp (GG). While gold is up 26% since September, the AMEX Gold Bugs Index is up 50% in the same time. Although DailyWealth is long-term bullish on gold and gold stocks, a healthy “breather” may be in the cards for the shares of gold miners. This correction would help gold stocks digest their gigantic gains of the past four months. Below is a look at the big run in gold stocks in the past year:
While the short-term action in gold stocks may be sideways or down, it helps to stand back, take a deep breath, and keep the long-term in mind. This look at the past five years of the AMEX Gold Bugs Index shows a well-defined bull market that is just beginning another leg up:
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