2 Stocks To Buy In Anticipation Of A Jobs Recovery
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As compelling as the LinkedIn (NYSE: LNKD) story may appear, it is trading at valuations which are impossible to justify. Investors should shy away from this stock and focus on older (and probably more boring) stocks which help recruit, hire, and pay employees.
With the increase in sales and advertising rates, LinkedIn reported its highest profit and sales so far in the third quarter of 2012. Since the announcement of their IPO in May 2011, LinkedIn's shares have been on the rise, beating most projections. Tom White, a research market analyst at Macquarie, said, "They continue to penetrate enterprises with their talent solutions business and continue to have plenty of upside opportunity there." On top of the revenue from ads, LinkedIn also benefits from their subscriptions and recruitment services. This is unlike rivals such as Facebook (NASDAQ: FB) and Twitter that get their income mostly from advertisements.
LinkedIn is still growing by the day. Chief Executive Jeff Weiner said, "Member page views grew 44 percent, well in excess of unique visitor growth, indicating that members are becoming increasingly active on LinkedIn." The increased number of features on the site has seen online traffic increase by 60 percent. Revenue from its talent solution services rose by 95 percent from the past quarter with the number of new customers increasing by 1,700.
More Growth Expected In a way these amazing results are not really news. Months ago, a group of analysts working for Jefferies published a report predicting LinkedIn's stock price would rise to over $140 within a year; a gain from its high of almost $123 per share achieved within the first few hours the stock's IPO. LinkedIn's shares have been trading above $100 since early August, when it announced second-quarter revenue above analyst estimates. Jefferies analysts predict that over the next few years LinkedIn's revenue will more than triple. Their predictions forecast a rise from the predicted $522 million in 2012, to almost $2 billion in 2014. To be perfectly fair, LinkedIn is not just hype like stereotypical dot.com bubble tech companies. LinkedIn is real: it has revenues and customers. LinkedIn sells ads on its pages, which accounts for a large fraction of its revenues. LinkedIn also generates sales from its platform service by charging fees for access to areas of its databases, and for the use of tools which enable employers find the best hires for a specific job opening.
Unfortunately, LinkedIn's current valuations are even larger than its growth potential. LinkedIn stock is rich on a price-to-sales basis since shares trade at a 10.87 multiple, eight times higher than the 1.29 the S&P 500 average. LinkedIn shares also have an indefensibly high 694.3 price-to-earnings ratio. This would be high even if the earnings growth forecasts manifest and tripled or even quadrupled. A 200 price-to-earnings multiple is still way, way too high.
Alternatives to LinkedIn: Recruiting and Employment Services
Consider the web 1.0 equivalent of LinkedIn, the online jobs portal Monster Worldwide (NYSE: MWW). It recently traded near $6 per share for a price-to-earnings ratio of 14.74, and a price-to-sales multiple of 0.74. These valuations are much, much, much more reasonable than those seen in LinkedIn shares. Even more interesting, this stock trades at a 0.63 price-to-book multiple, much cheaper than the 2.05 S&P 500 average. Investors should consider this as more than a 37% discount to net asset value because the book value does not count internally-developed intellectual property. If accounting rules allowed for the economic value of these assets to register on the balance sheet, then the firm's P/B ratio would be lower.
Investors who want exposure to an employment recovery outside of social media could also consider Manpower (NYSE: MAN) as a growth-at-reasonable-price opportunity. At $37 per share, this staffing and outsourcing mid cap stock offers good valuations. The 0.15 ratio of this stock is very attractive. Manpower shares are trading at a fair 15.02 price-to-earnings ratio, in line with the S&P 500 average. The price-to-book multiple of this stock is 1.20, cheaper than the 2.05 S&P 500 average.
Income investors will be pleased to note that Manpower shares produce a dividend yield of 2.22% dividend which is much higher than the 1.64% yield of the 10-year treasury bond. Future dividend payments are likely because the company pays out 0.29 of earnings as dividends, so earnings could drop considerably before dividends must be cut.
This comparison of a web 1.0 to its web 2.0 counterpart highlights how social media stocks are in the limelight. However, it must be noted that not all recruiting and employment stock are attractively priced.
On the other hand, Automatic Data Processing (NASDAQ: ADP) stock looks expensive based on valuation at a price of roughly $56. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 2.57 ratio. ADP shares currently trade at a high 20.32 price-to-earnings ratio, a higher value than the S&P 500 index.
Don't get sucked in to the Web 2.0 story. Many hot web 2.0 companies like LinkedIn and Facebook are still trading at ridiculous valuations. Some of these companies will grow into their valuations by realizing huge increases in sales and earnings. However, the unfortunate reality is that many of them will not. As a group these glamor companies will likely trail reasonably-valued companies in future investor returns.
Wise investors learn from history. In light of the web 1.0 bubble at the turn of the millennium, they should worry that the prospects for richly-valued social media losses seem eerily similar to those suffered from investing in the tech bubble. In those times, web 1.0 companies sold at prices which ignored valuation. It is now clear that investors were making a huge mistake by buying that bubble. Investors wise enough to learn from the past will not make the same mistake with social media stocks. Guided by web 1.0 lessons, they will consider Monster Worldwide or Manpower and refuse to buy LinkedIn until it trades at lower valuations.
BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and LinkedIn. 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.If you have questions about this post or the Fool’s blog network, click here for information.