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reddingrunner (97.48)

Bubble? What bubble?

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May 28, 2008 – Comments (2) | RELATED TICKERS: FCX , PBR , RIG

A bubble is not defined by a rapid rise in prices, a bubble is defined- or, more accurately, can be identified by- a rapid and unsustainable rise in the P/E ratio.  The P/E's of tech stocks in 1999 were obviously unsustainable- even if they continued to grow fast, the prices would have to have stayed flat for a long time just to bring the P/E's back to realistic valuations.  And, in fact, the prices dropped and sales continued to grow and today tech stocks are realistically valued for the most part- but if you bought in 1998 you haven't made much money in the last decade even if your company's sales have tripled- the growth was already (over-)priced into it when you bought it.

By contrast, look at the P/E's of oil and commodities stocks today.  If these companies grow revenues, their stock prices can be expected to keep up with the growth because current P/E's are mostly low.  There is no significant oil and commodities bubble- sure, they  may drop 25% by year's end (you never know) but two years from now they'll be much higher, not lower, than they are today.

2 Comments – Post Your Own

#1) On May 28, 2008 at 1:28 PM, FleaBagger (29.37) wrote:

You could have written the same article about homebuilders in 2006.

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#2) On May 28, 2008 at 7:32 PM, reddingrunner (97.48) wrote:

The difference is that housing had just doubled or more in a few years without a corresponding doubling in demand or expectation of a near-term future doubling.  

The increase in housing demand in the US will remain fairly close to the population growth rate.  Housing prices will, long-term, mirror demand.  But they rise and fall speculatively, rather than rationally, over the short-term.   

I'd avoid any energy or commodities stock that is primarily dependent on the US market.  My two housing stocks (since last year) have been GFA and HXM (CAPS scores relative to the S&P: +68, +25)- I'm not holding any US housing stocks.

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