Does anyone remember the Yahoo (YHOO) of 1999? As a reminder, Yahoo was going to change the world, it was the best thing since sliced bread and it was going to change the fate off all mankind for the better. Don't get me wrong, Yahoo has indeed contributed to mankind becoming better, but it has not changed the world and it has not made anyone rich, except for those who sold the stock many years ago.
As a reminder of the historic facts, the chart below illustrates the bubble logic that propelled Yahoo's stock to the moon and then back on planet earth again.
YHOO data by YCharts
As you can see, once upon a time Yahoo was a 100 P/E stock (like many back then). And like many other bubble stocks of the era, it has come back to planet earth, trading today at reasonable valuations. In fact, today it is dirt cheap compared to back then. But it's not only Yahoo. Does anyone remember what Intel (INTC) was worth back then?
INTC data by YCharts
Intel was also a big bubble back then. While today it is very reasonably valued, if you bought Intel back then -- thinking that it can sustain those valuations forever -- you are still underwater and you might never see the money you paid for Intel in this life.
If you take a look in both charts, sales today are much higher than in 2000 (in many cases several times over), but both Yahoo and Intel have been falling since then. Why did this happen? Because both stocks were running way ahead of fundamentals. Anytime that happens, we say (at least I do) that a stock is expensive. In the case of both Yahoo and Intel, back then they were more than expensive, they were bubbles.
So what can you do if you are a long-term minded investor (if you are a day-trader or swing-trader disregard this article), so as to not to fall into this trap? First of all, avoid stocks that have a high P/E and high Price/Sales ratio at the same time like the ones listed below.
Return on Equity
1y Target Est:
NetSuite Inc. (N)
Both Yahoo and Intel had similar valuations as the stocks listed above back then (today is a different story). And in my opinion, all those who buy and hold onto the above stocks over the long term, will be wondering what they were thinking about in several years, when these stocks go nowhere and fall in value.
Because while the market changes and new sectors and evolutionary companies come out, in the end there is a limit how far ahead in time you can discount current growth and future profits, before gravity finally kicks in, and the stocks you thought would change the world tank, even if their fundamentals keep getting better and better. And before you realize it, a decade would have passed and you would still be underwater.