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A case for low P/E in today's market

|Includes:Advanced Micro Devices, Inc. (AMD), AMZN, CRM, F, GME, NFLX

There are many arguments why one metric of measurement is better than others, and a lot of them make sense. In today's economy though, I feel that P/E is the most important metric.

A low P/E on a stock usually can be attributed to being on sale for one reason or another. Maybe sales have been bad, maybe growth prospects look poor, whatever it is, the stock is not very expensive.

The way I see it, over the next 5-10 years our economy can do one of two things. Recover wonderfully, or remain in a state of recession, and stagnation. It's pretty simple really when you look at it from that perspective. A low P/E is great in this case because if the economy recovers, then the P/E's of all stocks will inflate, including whichever low P/E stock you have chosen. It's no surprise that in times of a great economy that all stocks, no matter how poor will perform well. Ask yourself what's more likely a stock going from a P/E of 5 to 15, or a stock with a P/E going from 100 to 300.

Then there is the alternative that the economy remains in a low period. In this case, stocks will fall heavily. Those with P/E's over 50 are especially vulnerable in a contracting economy and will likely see the most pain. Those stocks already having a low P/E, assuming that they are otherwise in good shape, will see minimal pain as their stock is already valued at a low multiple. A solid stock trading at a P/E of 3 to 8 will be hardly touched. Stocks like AMD (AMD), Ford (F), and Gamestop (GME) may all do well considering their stocks are about as low as they are going to get. If there is a continual decline in the overall economy, these stocks won't feel it nearly as bad as some other stocks, such as...

Netflix (NFLX) has already dropped about 28%, Amazon (AMZN) has dropped about 18% (CRM) is down 26%. I think all three of these are solid companies, and will do well in the years to come. However their stocks are set up for implosion over the next 2 years. Will they grow? absolutely. But nowhere near what their P/E suggests they should grow. In my opinion, all 3 of these stocks, at these P/E are a big SELL.

Disclosure: I do not have any current positions in any stocks listed, nor do I intend to purchase any, however I may initiate short positions in NFLX, AMZN, and CRM sometime in the next 48 hours.