Why P/E Ratios Are for Losers
NEW YORK (TheStreet) -- Check out the standard bear case for stocks ranging from Amazon.com(AMZN) to Chipotle Mexican Grill (CMG) to Lululemon(LULU) . For all three, "value" investors argue that the stocks must drop because they sport lofty price-to-earnings ratios. In fact, some folks make this prediction as if it is Newtonian law.
As of Friday's close, AMZN trades at a current P/E of roughly 139 and forward P/E of about 74. CMG clocks in at approximately 62 and 39, respectively, while LULU notches a P/E of 58 in the here and now and 35 looking out one year. These three stocks, with the exception of a few very normal fits and starts, have done nothing but go up. Two-Year, Five-Year Returns
That's quite impressive, yet the bears remain defiant. As a popular talking point, bears compare these three companies (and others with high P/Es) to Netflix(NFLX) . They express an unconvincing certainty that what goes up must come down. They blast Jeff Bezos for spending too much, operating on "razor-thin margins" and not collecting sales tax. They wonder how the market could value a burrito joint at such a high "multiple." And they label LULU a passing fad that sells overpriced clothing to a fickle set of bored housewives. Rarely will AMZN, CMG and LULU bears listen to more holistic arguments about long-term opportunities, sound and sustainable business plans and brand loyalty between company and relatively high-end consumer.
If they listened to these and other more complex points, AMZN, CMG and LULU bears would stop using NFLX as a case study.
As I noted in a recent article, Amazon.com has been spending "too much" for more than a decade. Because I've covered AMZN thoroughly there and elsewhere, I focus on CMG and LULU in this article.
Both companies target a relatively affluent consumer. LULU appears to trend higher end, but, without a doubt, both largely serve the upper middle-class and higher sets who make Chipotle meals a habit and drop $100 on yoga pants on a regular basis. In different ways, Chipotle and Lululemon build brand loyalty with their core groups.
For Chipotle customers, the perception that they can get a quick, high-quality meal keeps them coming back. Here's how the company frames itself in its most recent annual report:
Our vision is to change the way people think about and eat fast food. We do this by avoiding a formulaic approach when creating our restaurant experience, looking to fine-dining restaurants for inspiration. We use high-quality raw ingredients, classic cooking methods and a distinctive interior design and have friendly people to take care of each customer--features that are more frequently found in the world of fine dining. Our approach is also guided by our belief in an idea we call "Food With Integrity". Our objective is to find the highest quality ingredients we can--ingredients that are grown or raised with respect for the environment, animals and people who grow or raise the food.