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.