Wednesday, October 11, 2006

Thinking Negative Thoughts

As I write this entry, there is a building burning on the upper east side of Manhattan. It appears that a small airplane or helicopter crashed into the building. Although it's probably just an accident, in this post-9-11 world, you have to wonder if it is terrorism related.

Perhaps news of a burning building has put me in a sour mood. It got me thinking about overvalued stocks. With the Dow at a record high, it might be a good time to think about this.

Google (GOOG) is the most obvious one that comes to mind--especially after it announced plans to buy a company that makes no money for $1.65 billion (see previous post). Google itself is a profitable company, but it is selling for more than 40 times expected earnings, more than 15 times sales, and almost 10 times book value. There are stocks out there that are more overvalued, but none that has a larger market capitalization.

Starbucks (SBUX) is another stock that appears overvalued. It is selling for 51 times expected earnings, almost 4 times sales, and 11 times book value. That seems like a lot to pay for what amounts to a chain of restaurants. Of course, Starbucks has tremendous growth prospects, but that doesn't warrant buying the stock at any price.

Finally, I still think the homebuilders should be avoided. I can't argue they are overpriced. In fact, their multiples look incredibly attractive. However, they are negative growth stories. Earnings are not growing; they are declining. These stocks may not sink a lot lower, but I certainly would not expect them to go higher in the near future.