No. of Recommendations: 9
But OK, we will wait for NVDA to trade at 15 P/E. Or CostCo for that matter.
There is no one size fits all right answer. We all don't need to do the same thing. Each one simply needs to do what they think is best for them.
Be that as it may, your comment did remind me of a recent Chris Bloomstran tweet about index valuation levels including some specific comments regarding Costco.
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Stunning. Nvidia passes Microsoft and Apple as largest market cap. Combined, the three are valued at $9.9 trillion, 21.5% of the entire market capitalization of the S&P 500. The three are today LARGER than the capitalization of the ENTIRE S&P in September 2011, not a market low.
Including Google, Amazon, Meta and Tesla, the Magnificent 7 have a $16 trillion combined market value, 34% of the S&P 500 and LARGER than the ENTIRE S&P as recently as February 2016, just over 8 years ago and most definitely nowhere near a market bottom.
Nvidia is valued at 42x and 78x trailing sales and earnings on an unsustainable 54% net profit margin.
Microsoft is valued at 14x trailing sales and 39x earnings on a 36.4% net margin.
Apple is valued at 8.6x and 33x trailing sales and earnings on a record 26.3% net margin.
These are crazy valuations for very large companies that can grow sales and earnings nowhere near as rapidly as they did over the past one and two decades. Microsoft and Apple traded for less than 10x earnings at various points over the past 20 years.
This is the goofiest and likely most dangerous concentration of overvaluation I’ve seen in 34 years investing and throughout financial history. The extremes extend beyond the three and seven to companies like fellow Nasdaq 100 member Costco, now with a $386 billion market cap on $254 billion in sales. Costco has a 2.8% profit margin, up from 1.7% when I first bought the stock. With $7.1 billon in earnings, the P/E multiple is an incredible 54x. How do you make money with an initial 1.8% earnings yield, 2.5% growth in systemwide square footage (down from 7.5% growth 20 years ago), double inflation same-store sales growth and modest potential to increase margins? You are looking at seven to eight years of no change in the share price for the stock to trade at 25x earnings.
Mr. Market is very good at rewarding business success but to a fault. In the short term, stocks can trade at extremes relative to fundamentals, both on the low side and the HIGH side. At 23x 2024 expected earnings, the market-cap weighted S&P 500 is froth with excess and in my judgment uninvestable. Under the hood, the majority of stocks are not overvalued. The bifurcation between the dear and the cheap reminds me of March 2000. From that point the index has returned 7% per year, spending much of the subsequent decade in the red. You can have extremes of over or undervaluation in the short and even intermediate terms. But in the long run, Mr. Market gets it right.
