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Trade Alert – Relative Valuation Analysis (and buying more metals)

Cody Willard

Cody Willard

— 4 min read

Don’t forget this week’s Live Q&A Chat at 2pm EST at http://tradingwithcody.com/chat. Be there or be square. Speaking of being square, I don’t think the action in the gold and silver markets is “squaring” with the reality of actual prices in the market place. There’s a serious and non-stop demand for physical gold and silver around the world and that’s putting a floor in the charts here. I’m going to add to my gold and silver investments by buying some more physical gold and silver this week. I’m also bullish enough about the next three months for both gold and silver that I’m buying some September GLD calls with strike prices from $135-140 and I’m buying just some outright “common” shares in the SLV ETF.

Let’s step back from the fray for a moment here and get some perspective on just how wacky this ongoing stock market bubble has gotten. That’s right, it’s time for a round of our “Relative Valuation Game” in which we look at the straight stock market capitalization of a bunch of different stocks and sectors. When the relative valuation of, say, Priceline, starts to rival that of say, Ford, you might want to question the long-term viability of some of our investments. I remember back in 2000 when Nortel was worth $200 billion and Level 3 was worth $50 billion vs. a valuation of $80 billion at Ford at the time and soon thereafter turned bearish on the telecom sector. Nortel’s stock ended up worth $0 and Level 3 stock is worth less than 1 cent on the dollar of what it was worth back then. Ford’s valuation is down is at $60 billion today. Bubble is as bubble does, eh?

So without any further ado, here are some of today’s Relative Valuations, as measured by the company’s number of shares outstanding multiplied by the current stock price.

Net/Cloud/Smartphone/App Revolution Stocks

  • Microsoft – $295BB
  • Apple – $410BB
  • Google – $290BB
  • Amazon – $125BB
  • Priceline – $40BB
  • Yahoo! – $30BB
  • Facebook – $60BB
  • AOL – $3BB
  • Netflix – $12BB

Old Media Stocks

  • Disney – $115BB
  • CBS – $30BB
  • News Corp – $80BB

Big Semiconductor Stocks

  • Intel – $125BB
  • Arm Holdings – $20BB
  • Texas Instruments – $40BB
  • Qualcomm – $105BB
  • Nvidia – $8BB

Old World Stocks

  • Caterpillar – $55BB
  • 3M – $75BB
  • Dupont – $50BB
  • John Deere – $35BB

Welfare Bank Stocks

  • Visa – $116BB
  • American Express – $85BB
  • Wells Fargo – $215BB
  • JP Morgan – $200BB
  • Goldman Sachs – $80BB

Healthcare Profiteer Stocks

  • Gilead – $80BB
  • Merck – $145BB
  • Johnson & Johnson – $240BB
  • United Health – $65BB
  • Bristol-Meyers – $75BB
  • Aetna – $20BB

Consumer Stocks

  • Pepsi – $130BB
  • McDonald’s – $100BB
  • Wal-Mart – $250BB
  • Dollar General – $17BB
  • Dollar Tree – $11BB
  • Gap – $19BB
  • Ambercrombie & Fitch – $4BB

Car Stocks

  • Ford – $60BB
  • Tesla – $12BB
  • Toyota – $190BB

Okay, so let’s run through some “Relative Valuation Game” numbers here then. I think the first thing that sticks out is the huge relative  valuation of Priceline at $40BB. That means Priceline is being valued by the market at more than John Deere and more than CBS and more than Yahoo! and is worth as much as Texas Instruments. I would think that a CBS and YHOO long paired up with a PCLN short would probably play our profitably over the next five years if not sooner.

Will Google or Microsoft or Apple or Amazon or some other new (or old?) tech big wig have the highest market cap in 2020?

How about the idea that Netflix is worth four AOL’s (which itself was bought for $100BB by Time Warner back at the top of the dot-com bubble in 2000)? Is Netflix really worth 1/3 as much as CBS? Or because it’s disrupting so much of CBS’ TV viewership will it eventually be worth more than CBS? Is Yahoo! and all its users and content and distribution only worth about 2x as much as Netflix? Will it be worth more or less in five years?

In healthcare, Gilead catches my eye as it’s being valued as worth more than United Health Care and worth more than Bristol-Meyers too. Is every major health care company headed higher as the healthcare-lobbyist-written Obamacare kicks in and pumps their bottom line? I can see the big HMOs like UNH and Aetna doubling their market caps from here once the Obamacare juice starts to flow, no?

Is Dollar General really worth almost as much as Gap? I’m short Dollar Tree in large part because I don’t think it’s worth as much as three Ambercrombie & Fitch’s or four AOL’s or more than 1/2 as much as Gap.

Is McDonald’s really a 12-digit market cap at $100,000,000,000? A hamburger commodity chain is worth more than Caterpillar and John Deere combined? Is MCD at 18x earnings vs’ AAPL at 7x earnings a better bet? I don’t think so. Buy Apple and short McDonald’s? Not a bad, if not perfect, paired trade.

If you piled five Tesla’s on top of each other, would that company be worth as much as Ford? In other words, is Ford really only worth 5x as much as Tesla? Will Tesla someday be worth as much as Ford? I’d rather not own either one, personally, as the carbon credit trading taxpayer scam and endless other subsidies (including using taxpayer money for subprime auto loans from Allied and the other government-owned banks) for the auto industry are not sustainable for the next decade.

Stocks can go up 10-fold and then crash 99% and then rally 10-fold again and then fall 50% and then double and then crash 90% and so on…and having a sense of when a stock’s own valuation is out of whack relative to the rest of the market can help you plan for those kinds of moves ahead of time.

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