📈 Price is Right
Last weekend’s Super Bowl sadly marked the end of yet another football season. Everyone has their favorite aspect of the Super Bowl, whether it's the food, the commercials or our personal favorite - the prop bets. Luckily, we had a profitable betting day based on winning a variety of props ranging from normal sports bets to the absurd.
Bengals +4.5 ✅
Rams take first Time out ✅
Over 100 seconds to sing the National Anthem ✅
Cooper Kupp MVP ✅
Before we spend the rest of the article talking about sports let's get back to finance. Just like you can bet on about a million things for the Super Bowl you can invest in about a million different stocks. And, just like these bets, they have a wide variety of prices. Judging what constitutes a good bet or a bad bet depends on interpreting these prices to decide what constitutes a fair price.
To start, let's look at two popular companies and their stock price as of February 16th.
Apple = $172.55/share
Tesla = $923.39/share
From this do we know which company is more valuable? Based on price alone, Tesla is more expensive but, as we have previously mentioned, there is a difference in the price of one share and the overall value of the company. Now, let's look at Market Capitalization or how much the company is worth.
Apple = $2.82 Trillion
Tesla = $954 Billion
Despite the share price being vastly higher, Tesla (while still huge) is worth ~⅓ of Apple. So how do we know which one is a better “bet”?
For a long time, financial analysts have used something called Price-to-Earnings ratio (P/E) to compare companies of different sizes and prices. It divides the price of the stock by the earnings per share to get a metric on how much you are paying for each dollar the company earned in the last year.
Apple P/E = 28.65
Tesla P/E = 188.42
In this case, that makes Tesla much more expensive than Apple. Based on P/E ratio, you have to pay over 6x more for each dollar of Tesla’s earnings than Apple’s. Which brings up the logical question: why are these companies valued so differently despite both being hugely successful companies?
A high P/E ratio simply means the market thinks the company will continue to grow at a high rate. Tesla has proven this over the last several years as it rapidly expands and becomes more profitable. Apple is routinely one of the largest and most profitable companies in the world but, given its huge size, the market is simply saying they believe it has less growth in its future.
So High P/E = Huge Potential and huge risk if they fail to live up to this potential. For example, if Tesla simply kept earning what it does, which is billions per year now, the stock would fall into the $100 range!
Just like placing a prop bet, there is a right price for everything. Betting on the coin flip is even odds, a $100 bet pays $100 if you win which is fair because it's 50/50. However, betting on the MVP is near impossible (yes we are that good) so a $100 bet pays $500. Stocks are the same way, more risk can equal more reward. Just make sure the price is right.
What’s The Upside?
While P/E is not the end all be all statistic for picking stocks it helps guide what is a fair price for a company based on it’s growth prospects. It gives you a much better idea of a company's value than stock price or market cap.
Knowing how much you are paying for earnings will help determine whether or not to “bet” on a company. If you see a high P/E ratio but believe the company can grow fast to meet that ratio, come on down.
If not just remember these stocks come with a higher level of risk. Or as Happy Gilmore said…
**Editor's Note: Investing in the stock market is not gambling, in the long run all gamblers lose. Individual stock picks can be considered a gamble, but investing using diversification is a winner in the long run.
For Your Weekend
Our round-up of essays, podcasts, and streaming shows to check out over your weekend. We cast a wide net so you don’t have to.
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Legendary journalist and satirist PJ O’Rourke passed away this week at 74 after a bout with lung cancer. The obits and remembrances have poured in from the national press, hailing a man with a singular voice and gimlet eye.
Personally, I was introduced to Mr. O’Rourke when my dad handed me a copy of his bestseller Holidays in Hell. The book details O’Rourke’s travels around the world and documents the ludicrous things he finds there. The subtitle is: “In Which Our Intrepid Reporter Travels to the World's Worst Places and Asks, "What's Funny About This?”
While I was in my early teens when he gave me the book, I remember howling with laughter at the stories I understood, and researching and then howling with laughter at the stories I didn’t entirely get. Ah, youth. O’Rourke’s style and voice certainly influenced my own development as a writer. He will be missed.
For a touching remembrance, read Matt Labash’s obituary on his Substack Slack Tide:
This past Tuesday morning, the news broke hard and cruel that another of the good guys had left us. Though “good” guy is a sinful understatement in the case of P.J. O’Rourke. He was the best guy. Anyone who knew him would readily admit this, even if hating to do so while uttering that ugliest of past-tense verbs (“was”) through gritted teeth. Having been recently diagnosed with a fast-metastasizing cancer, P.J. was taken by a blood clot in his lungs. Or so I think I heard from the mutual friend who relayed the grim particulars. It’s difficult to keep your facts straight while the wind’s being knocked out of you.
“Why couldn’t it have been you?” said my old friend, Jack Shafer, once the bad tidings had settled. It’s Jack’s traditional irreverent refrain, whenever someone we like dies - a raspberry directed at the Reaper, who is no respecter of persons.
O’Rourke also popped up in other outlets, like this Car and Driver feature from 1980 where he gets to drive a brand-new, blood-red Ferrari across country.
Ferrari Reinvents Manifest Destiny: P.J. O'Rourke Drives Cross-Country in a Ferrari 308GTS
We came by a 930 Turbo Porsche near the Talladega exit. He was going about 90 when we passed him, and he gave us a little bit of a run, passed us at about 110, and then we passed him again. He was as game as anybody we came across and was hanging right on our tail at 120. Ah, but then—then we just walked away from him. Five seconds and he was nothing but an overturned-boat-shaped dot in the mirrors. I suppose he could have kept up, but driving one of those ass-engined Nazi slot cars must be a task at around 225 percent of the speed limit. But not for us. I've got more vibration here on my electric typewriter than we had blasting into Birmingham that beautiful morning in that beautiful car on a beautiful tour across this wonderful country from the towers of Manhattan to the bluffs of Topanga Canyon so fast we filled the appointment logs of optometrists' offices in 30 cities just from people getting their eyes checked for seeing streaks because they'd watched us go by.
Chuckle:
