Sunday, June 23, 2013

Less Bad Does Not Equal Good

One way to tell if a market is getting over heated is when columns determine a stock is "cheap" via a relative comparison.  It would be like me saying "that glazed donut is better for you than the jelly donut, therefore you should eat the glazed donut".  The real answer is not to eat either donut.

I think about this as I was reading Barron's article this weekend about buying Revlon stock.  Here is what they said:  "MANY CONSUMER-PRODUCTS outfits are valued based on enterprise value (equity value plus debt), divided by earnings before interest, taxes, depreciation, and amortization. Revlon is valued cheaply relative to its peers at about nine times estimated 2013 Ebitda of $250 million (this projection includes spending on "permanent displays" at retailers). "

Now they may be cheaper than COTY or Estee Lauder, but 9x estimated EBITDA is not cheap by my yardstick for a company with no moat.  Now perhaps the answer is to go long Revlon and short COTY, but that is not a game I play.

I saw this a lot in the 1999-2000 Internet bubble. People would say to buy Vitesse Semiconductor over AMCC as VTSS was trading at 50x next year earnings and AMCC was 80x.  Those were wild days.

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