The Kiss of Death
by Tom Dyson
January 17, 2006
Today’s letter is about Google… and the Hunny Club
Google (GOOG) is a media company… possibly the most popular media company on Earth.
The Hunny Club, as described in the November 16 issue of DailyWealth, is the most exclusive club on Wall Street. Only a few companies have ever been invited. But membership is a kiss of death. Bad things happen to those that join…
The Hunny Club is open to all stocks with a market value greater than $100 billion and a p/e ratio greater than 100. In short, the Hunny Club is a list of the most over hyped, overvalued big companies in the stock market.
Last week, Google made it into the Hunny Club. Google’s market value is $137 billion. And it trades at a P/E ratio of 103. There’s not another company in America that comes anywhere close to a valuation like this.
Entrance into this club doesn’t mean Google’s share price will fall immediately… and it’s not cause for an immediate short sale. It’s just a glaring sign the stock is wildly popular and overvalued.
In fact, in the 18 months since Google first traded on the stock exchange, I’ve seen over 35 sell recommendations put out by newsletter writers and market journalists. They were all wrong, every single one of them… Google has continued to soar.
For a quick and dirty comparison, here is a list of large American corporations. The market value of each of these companies is around $140 billion. Beside each company you’ll find annual sales for 2005, in billions.
JPMorgan
|
$50 |
IBM
|
$94 |
Berkshire Hathaway
|
$76 |
ChevronTexaco
|
$174 |
Proctor & Gamble
|
$58 |
Google |
$4 |
Can you spot the over-valuation?
Even though Google earned only $1 billion last quarter, its costs are out of control. Google is paying $1 billion for 5% of AOL. It’s building 1 million square feet of office space within the NASA research park at Moffett Field in California.
They want to provide free wireless internet to everyone in San Francisco. They recently bought a new Boeing 767-200 wide body airliner with two staterooms and a shower. This kind of spending smacks of the internet craze of the late 90s.
As Steve said when he first introduced the Hunny Club in November, “It’s a prestigious club to be in…one that leads to share price obliteration…in all cases.”
We can’t use Google’s entry to the Hunny Club as a sell signal. There’s still too much upward momentum and we’d likely end up on the trash heap like all those other analysts.
But one thing is for sure: Sooner or later, just like those other market darlings, Google will be kicked out of the Hunny Club. When that happens, it may be an excellent chance to make some money. We’ll be waiting...
Good Investing,
Tom Dyson
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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