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The Kiss of DeathBy
Tuesday, January 17, 2006
Today’s letter is about Google... and the Hunny Club Google is a media company... possibly the most popular media company on Earth. The Hunny Club, as described in the November 16 issue of DailyWealth, is the most exclusive club on Wall Street. Only a few companies have ever been invited. But membership is a kiss of death. Bad things happen to those that join... The Hunny Club is open to all stocks with a market value greater than $100 billion and a p/e ratio greater than 100. In short, the Hunny Club is a list of the most over hyped, overvalued big companies in the stock market. Last week, Google (GOOG) made it into the Hunny Club. Google’s market value is $137 billion. And it trades at a P/E ratio of 103. There’s not another company in America that comes anywhere close to a valuation like this. Entrance into this club doesn’t mean Google’s share price will fall immediately... and it’s not cause for an immediate short sale. It’s just a glaring sign the stock is wildly popular and overvalued. In fact, in the 18 months since Google first traded on the stock exchange, I’ve seen over 35 sell recommendations put out by newsletter writers and market journalists. They were all wrong, every single one of them... Google has continued to soar. For a quick and dirty comparison, here is a list of large American corporations. The market value of each of these companies is around $140 billion. Beside each company you’ll find annual sales for 2005, in billions.
Can you spot the over-valuation? Even though Google earned only $1 billion last quarter, its costs are out of control. Google is paying $1 billion for 5% of AOL. It’s building 1 million square feet of office space within the NASA research park at Moffett Field in California. They want to provide free wireless internet to everyone in San Francisco. They recently bought a new Boeing 767-200 wide body airliner with two staterooms and a shower. This kind of spending smacks of the internet craze of the late 90s. As Steve said when he first introduced the Hunny Club in November, “It’s a prestigious club to be in...one that leads to share price obliteration...in all cases.” We can’t use Google’s entry to the Hunny Club as a sell signal. There’s still too much upward momentum and we’d likely end up on the trash heap like all those other analysts. But one thing is for sure: Sooner or later, just like those other market darlings, Google will be kicked out of the Hunny Club. When that happens, it may be an excellent chance to make some money. We’ll be waiting... Good Investing, Tom Dyson Market NotesWHAT MR. MARKET IS SAYING ABOUT REAL ESTATE
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Once a week, it helps the investor to gather up fundamental real estate data like home price figures and housing start numbers, then throw them in the trash and listen to what the markets are saying. The markets in this case are the stock prices of publicly traded real estate companies like Equity Residential (EQR), the largest publicly traded owner of apartment buildings in the US, and Simon Property Group (SPG), the nation’s largest shopping mall owner. As the two-year chart below of the iShares Dow Jones U.S. Real Estate Index Fund (IYR) shows, the market says: “Real estate is holding up pretty well, and near all-time highs.” This exchange-traded fund is made up of a wide variety of real estate firms like EQR and SPG. It displays the conditions of the industry, good or bad. If the going gets tough in the real estate market, this security will break down and let us know.
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