I thought it would be difficult to find overpriced companies. I was wrong. Even in an environment like this, I was able to find people paying more than they should for stability. It's like buying ice cream in the middle of winter and expecting the demand to increase in the short term. It just isn't going to happen. I covered why it didn't make sense to pay face value for companies like Johnson and Johnson (JNJ) in times like this about a month ago --- but here's a company that's just downright overpriced. Don't believe me? Check back in a month.
The Stock to Drop:
Strayer Education (STRA) is priced way too high! At $237 it's got a PE of 45. This implies a future growth rate of 32%. Take your gains! No analyst has a growth rate this high! As I learned in business school the best companies operate out of closets and tool sheds to avoid unnecessary expenses. Ask Glen Campbell, founder of HatWorld. He lived in his store while Lids executives were out eating fancy dinners on their investors time. Lids went under. HatWorld bought Lids out and made it profitable. Back to Strayer --- they just moved HQ:
"This building offers dramatic architectural features that include floor-to-ceiling glass, maximum efficiency, upscale common area finishes, and unparalleled signage opportunities on the Dulles Toll Road," said Chris Chambers, partner of Herndon-based Crimson Partners, which developed the building.
Sounds ridiculous to me --- why would I pay this much for growth. It's got a 10-year track record. It's been growing at a rate of 20% for the past 5 years.
The Stock to Rock:
Factset Research's (FDS) 5 year quarterly revenues can be matched with a logarithmic growth of 23% with a regression coefficient of 0.999. It's priced to grow at 7.3%. Analysts expect somewhere between 14% and 18%. Basically, they provide their services to financial institutions and hedge funds. I figure the best time to get down and dirty in the research numbers is when the markets aren't reflecting accurate prices. Let's see if I can think of a time when the market's are behaving irrationally… hmm… How about now? This is kind of like my Nasdaq OMX (NDAQ) play on volatility expectations. As more trades happen, I expect the exchanges to make more money is very similar to the concept that as more irrationality is priced into the market, I expect more financial institutions to start crunching real numbers. You can lay-off your employees, but you still need the data.
I'll close with a quick break down of stock price for beginners: There's three things that determine a stock's price.
- Intrinsic Value
- Growth Expectations
- Market Volatility
Intrinsic value can be pulled from the Balance Sheet. Growth Expectations can be pulled from future projections of the income statements and is impacted by all news. Market Volatility can be seen as the difference between the price and the Intrinsic Value and Growth expectations. If you can find companies that are predictable --- your ability to pick ones that are suffering from negative market volatility as opposed to the two others is greatly enhanced.
Disclosure: I currently don't own either FDS or STRA.