reddingrunner (95.10)

Bubble? What bubble?

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.