Winners Keep on Winning
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In case you haven't yet watched this short video in which Motley Fool co-founder David Gardner explains his rationale behind many of his most successful investment calls over the years, I highly recommend you do. David explains an important concept which has the potential to really broaden your horizon when it comes to investing in the markets, so this may be a remarkably well spent five minutes.
The main point can be summarized like this: winners keep on winning, so don't stay away from a stock only because it has been rising strongly, or even if it’s looking expensive from a valuation perspective. In fact, many of the most extraordinary names to hold for the long term can be found among those hot outperforming stocks.
David explains how Amazon.com (NASDAQ: AMZN) has been called an overvalued stock for a long time, including the – really funny but spectacularly mistaken - Amazon.bomb cover from Barron's Magazine back in May 1999.
The stock had its shares of ups and downs along the way, but it has delivered some astonishing returns for those who had the conviction to stick through the volatility and hold the company for the long term.
Interestingly, many investors are still using the same bearish argument for Amazon these days. At a P/E ratio above 3000, the stock does look “overvalued,” although the picture gets more rational if you consider other metrics like sales or operating cash flows. However, this still misses the point.
Amazon is a unique company, disrupting the retail business via unbelievably low prices and amazing operating efficiencies. The company still has many years of growth ahead as it incorporates new product categories and expands into areas like cloud computing. International expansion has barely even started, and Jeff Bezos is deservingly known as one of the most innovative business leaders in the world.
The point is making an investment decision about a unique, disruptive, company like Amazon based solely on current valuation misses the broader picture. There is much more than current earnings to the Amazon story, and investors need to keep that in mind when analyzing the stock.
The same goes for companies in the 3D printing space, this technology has the potential to literally change the world, disrupting the manufacturing process for all kinds of products and allowing for unlimited customization among other advantages.
3D printing is already being used in some very demanding industries like healthcare and aerospace, but the best may be yet to come as the technology is becoming more affordable and easier to use by the day.
In fact, 3D printer manufacturers like 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS) are seeing accelerating growth rates in the last years as the technology becomes more popular and the industry consolidates via acquisitions.
For investors who believe in 3D printing, the growth picture is looking increasingly attractive, so the fact that these companies are trading at P/E ratios above 100, and near all-time highs, should not be considered a reason to stay away from the sector. After all, if things play out as expected, current prices will probably look like a bargain five or six years down the road.
The price of quality
Not only companies with disruptive technologies deserve to trade at a premium. Starbucks (NASDAQ: SBUX) is trading at a P/E ratio above 30, which is certainly not cheap for a company in the coffee business. However, this may be a traditional business, but Starbucks is by no means a traditional company.
Just like Starbucks products command a premium versus other alternatives due to brand differentiation and a unique cultural footprint, this premium deserves to be reflected in the price of the stock. Howard Schultz arguably invented specialized coffee as whole new product category, and the company has some very exciting growth prospects in emerging markets like China.
Paying extra for investing in a company led by Jeff Bezos has proven to be a wise decision in Amazon's case, and the same goes for Howard Schultz and his visionary strategic direction for Starbucks. A unique brand and a top notch management team justify a higher than average valuation for the stock.
Following the same logic, Walt Disney (NYSE: DIS) investors have no reasons to feel puzzled or concerned, on the fact that the stock made new all-time highs above $54 per share on Wednesday. Bob Iger and his team have proven their ability to successfully integrate acquisitions like Pixar and Marvel in the past, and the Lucasfilms purchase adds another bunch of tremendously valuable characters to the company's fabulous collection.
In addition to the rights to profit from some very famous characters, Disney owns many powerful brands like ABC, ESPN and Pixar among others. Besides, The Avengers has been a record breaking blockbuster which showed that the company's movie studio segment is as strong as ever. As long as Disney continues executing exceedingly well and profiting from the value of its intellectual properties, the stock should be making new highs from time to time. There is nothing wrong with that.
Investors are usually spooked away by stocks with strong past appreciation or high valuations, but there is much more to a company than price charts and valuation ratios. Identifying the best investments sometimes requires a little outside the box thinking, so keep this in mind if you don't want to miss some of the best investment opportunities of our times.
acardenal owns shares of Amazon, 3D Systems and Disney. The Motley Fool recommends 3D Systems, Amazon.com, Starbucks, Stratasys, and Walt Disney. The Motley Fool owns shares of 3D Systems, Amazon.com, Starbucks, Stratasys, and Walt Disney and has the following options: Short Jan 2014 $55 Calls on 3D Systems and Short Jan 2014 $30 Puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!