The lesson of history is this: Bubbles eventually pop! In 2000,
investors felt the nasty sting of that fall, both seasonally and
directionally, for a decade or more. Victims of the late 1990s tech
boom neglected basic laws of intelligent investing and replaced
them with nonsensical metaphors to justify greed, like
profits don't matter
Now, as the stock market soars, isolated strains of valuation
amnesia have been reported once again. And among a few momentum
stocks, the possibility of massive overvaluation is more than
Bubbles usually start around real ideas, often ideas with dreamlike
investment potential. In the 1840s, it was railroads. In the 1920s,
we had radio, automobiles, aviation, and electric power grids. In
the 1980s, it was anything Japanese.
By the late 1990s, Internet and e-commerce stock valuations
rocketed into the stratosphere. While a few of the highly-touted
bubble stocks grew into big winners, most bombed.
These days, the bubble is more narrowly focused-battery-powered
cars, 3D printers, and software-as-service stocks.
Conceptually, we love all three. What could be better than a car
that uses no gas and has Ferrari-like pickup? We love the idea
); we love the industry and love the product, but can't help but
wonder if 100 times earnings might be a wee bit frothy for a car
Similarly, there's little doubt that 3D printers have the potential
to change the world. Still, it's far from obvious which companies
will be massively profitable as a result.
We expect commoditization of 3D printing (which implies meager
future margins), and wonder with amazement at the valuation of
), trading at 114 times estimated earnings in 2014.
In software-as-a-service, take your pick of silliness: Customer
relationship manager software firm
) trades at 104 times estimated 2014 earnings, or human capital
management software vendor
) boasts a P/E of infinity because it earns nothing and isn't
expected to be profitable for at least the next couple of years.
Another sign of excess is online real-estate information firm
). Like most bubble firms, Zillow is exceptionally well-managed,
growing quickly, and has a fantastic market position with a
disruptive product. It just isn't worth 240 times forward estimated
Thanks in large sum to the Fed, the spigot is on for the stock
market, but risks are beginning to rise. Valuations for high-growth
stocks are no longer below average. Pockets of excess - although
not yet widespread - are clearly popping up.
Rational stock pickers - people who buy great businesses at
reasonable prices - seem likely to beat those chasing the latest
hot thing. Be careful of glamour stocks like Tesla, Salesforce.com,
Workday, Zillow, and ExOne.
Editor's Note: This article from
by James Oberweis was originally syndicated by
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