Wednesday, July 2, 2008

Does Valuation Matter?

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I always wonder about this valuation thing - at times it simply seems all that matters is what people want to buy (relative strength) and valuation means nothing. Case in point, I'd like to show you two stocks.

#1 is a fund holding we've had for a long time - Illumina (ILMN). I never have it as a major position - it usually sits around 0.5% to 1.25% of the portfolio because I always think it's "too expensive". I rarely talk about it other than around earnings. I've been watching it act incredibly well during this correction - living in its own universe. It's not sexy and it never makes our "top gainers for the week" but the chart over the long run is fantastic. Valuation? Ridiculous. Forward P/E ratio of 75 on $1.20 of 2008 full year estimated earnings. That doesn't matter - all it does is go up. [Dec 20: Nice Writeup on Illumina]



#2 is a tech stock I've tried to short multiple times in my personal life over the years (and lost money every time I am sure) as it's always traded at 100x+ forward estimates! Yet it always stays at some amazingly nonsensical (to these eyes) valuation - Salesforce.com (CRM). Valuation? Ridiculous. Forward P/E ratio of 200.



When I was looking for a new tech stock to add to the portfolio this was far and away the best chart but being a "growth at reasonable value" guy at heart, every other name I considered was trading at a PE multiple BELOW it's growth rate. Yet CRM has outperformed every other one I considered. And this folks is why the market will pummel every rational brain cell from your body the longer you stick around. :)

I do realize these are somewhat unique companies but gosh - those are some steep valuations. But at times it simply pays to stay onboard as long as the whales keep wanting to eat this type of fare.

Long Illumina in fund; no personal position

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