Stock market is expensive. Twitter IPO is expensive (without profit). More expensive than Facebook and LinkedIn. But anyway, I think the stock will soar today. The question is: for how long? For all I know we will be forced to buy shares in the aftermarket if we want to grab some.
Twitter say this stock is more risky themselves and that is bad news for the investors considering what happend to Facebooks IPO in the aftermarket. The demand for this stock is huge, and we will probably see the stock skyrocket in the beginning.
Twitter is unprofitable at the moment and they are headed in the wrong direction. In the first six months of 2013, they increased the loss by 41% to $69,3 million. Like I have said before: Shareprice follow earnings, so what are you thinking about the Twitters share price? Based on the info we have so far, it doesn`t bode well for the Twitter shares.
Another ting is the market timing. Expensive shares in an expensive stock market is not a good mix. Everyone is buying into the Twitter IPO hype, and the analysts predict a target price as high as $50. Facebook and LinkedIn appear cheap at about twelve times forward sales, while Twitter is valued at about thirteen times forward sales. That`s not cheap with a company with so many losses.
It`s effective to look at the companys price to earnings if you wonder what price should be. What you really do is comparing the price of the company today to its ability to produce earnings in the future (cash). But the corporate earnings are very influenced by the business cycle.
The U.S experiences a boom approxomately once every ten years. At times like that, the companys will have higher price to earnings than other times because of the business cycle. That is the reason why we see high stock prices. Sometimes it all end up to build a huge bubble.
“CAPE” adjusts for this by measuring the stock price against the average of ten years worth of earnings adjusted for inflation. Doing it this way, you will better see the companys ability to produce cash in any economic environment.
CAPE is a good measurement for long term investors. It measures future stock returns. CAPE outperforms P/E ratio, Government Debt/GDP, Dividend yield, The Fed Model and many other metrics used to predict the market value.
Take a look at the chart below. It tells us that the S&P500 has a CAPE of over 24, which means that the market is trading 24 times its average earnings of the last ten years.
In other words; if you bought the entire stock market today, it would take you about twenty four years to make your money back. Is that cheap? No way, but every time (only a handful of times in the last 100 years) we`ve been closer to a market top, then a new bull market run.
Important news today: Unemployment Claims, Advanced GDP and ECB press conference at 8:30am. ECB president Draghi speaks at 2pm.
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