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Add to MSN Stock List Message Board | SuperModels 11 stocks where the stakes are too high If you want to gamble, visit the Strip, not the Street. Vegas gives you the odds right up front. But if youre handicapping the market, heres one way to spot long shots. By Jon D. Markman Cynics derisively compare the stock market to a casino, but theyve got it all wrong. Casinos are a lot more fun these days -- and if you play the right games, theyre a lot more honest, too. Casinos, after all, publish their odds so patrons can make rational choices about risk if they choose. One of the few comparable metrics on Wall Street is the price-to-earnings multiple, which to a limited extent measures the level of investors expectations for an individual companys growth. The higher the number, the greater the expectation -- and the greater the risk of disappointment. In a moment, Ill propose a way of finding stocks for whom expectations seem too high. But first, let me digress to describe a few hours spent on Sunday afternoon studying risk factors in what you might call alternative investments at the Paris Las Vegas, a make-believe French resort in the desert where the Latino doorman greets you with an improbable, Bonjour! I dont play blackjack or craps because I cant count cards or shoot straight, so instead I headed to the section of the casino devoted to swearing at athletes -- the sports book. The amphitheater of a major casino sports book looks like a fans dream den, with three dozen super-sized TVs displaying 25 or more baseball and basketball games, horse races and golf tournaments all at once -- the sound turned up full blast on several at a time. Rather than hearing your spouse imploring you to fold laundry as you settle in to watch a game or five, youve got waiters circling with complimentary beverages. And if you want to smoke a cigar, no one will give you the hairy eyeball.
After studying arcane symbols on the scoreboard-style walls for a few minutes with all the sophistication of a Bordeaux farmhand, my reporters instincts kicked in gear, and I began to pepper one of the attendants with questions on how to place bets. And as soon as he began to speak, it hit me with the force of a 90-mph fastball that I felt a lot more confident putting 10 bucks on the Mariners to beat the Yankees over the next two hours, than I did in betting seven bucks on Sun Microsystems For one thing, sports bettors have a lot more information at their fingertips than investors. A look at the baseball equivalent of a Racing Form -- provided by nonstopsports.com -- revealed that Yankee pitcher David Wells sported a 4-0 record but also had a lousy 4.15 earned-run average. In contrast, the Seattle pitcher, Joel Pineiro, whom I have researched for the past year as a fan and believe to be a gutty performer, may have only had a 1-0 record but his ERA was 1.10. The Mariners had good momentum, having beaten New York the past two games and five of their past six during the regular season in Yankee Stadium. Plus, they rock in day games against lefties. But the form showed the Bronx Bombers rarely get swept at home. Good luck finding stats of such depth to support a trade in Sunny Mike late on a Friday after four straight losing sessions of 1% or more with the Dow Jones industrials ($INDU) near their lowest levels of the week. Instead of market makers and specialists, sports books have professional handicappers who decide on the opening line of a game -- essentially the odds that each team will win. On Sunday morning, the opening line at 9 a.m. PT started at +130 for the Mariners, meaning Id have to bet $10 to net $13. But this is an efficient market, and just as in the market for stocks, the smart money comes in big and early, affecting prices. Maybe a pro thought he saw Pineiro throwing badly in the bullpen, but by the time I was ready to bet at 10 a.m., the line had gone to +135, meaning I could win $13.50 for a $10 bet. This makes same-day sports betting the equivalent of a call option that expires in two hours. If youre right, you make 135% or more in short order; if youre wrong, you lose everything. The important thing is that as the odds lengthen, you must consciously decide whether to take on more risk in order to reap the higher reward. As you walk farther and farther out on the tightrope, you must be increasingly certain that your assumptions and expectations about the future are correct. P/E: Wall Street's opening line In a sense, the Wall Street equivalent of the opening line is a stocks price-to-earnings multiple. The higher it goes, the greater the risk that expectations might be too high, and thus the greater the potential for an expensive and disastrous disappointment. At the highest multiples, expectations may be so high for growth that they can never be fulfilled, much like the 200-1 odds you can get this week on a bet that the Tampa Bay Devil Rays will win the 2002 World Series. Investors took this risk blithely with large stocks from 1998 to early 2000, bidding multiples on rookie stocks with no quantifiable history of expectation fulfillment to extreme, triple-digit levels. And, of course, they were burned when their bets expired worthless. Its clear that one of the reasons that low-P/E value stocks have returned to favor in the past two years is that investors grew weary of making wagers on high expectations. A bet on low-P/E value stocks may not pay off as much as those highfliers of the past, but the risk of disaster is much lower as well. Of course, big-company stocks that have no P/E multiple because they have no earnings represent the craziest high-expectations bets of all. To be a buyer of AOL Time Warner Vivendi Universal Paul McEntire, portfolio manager of the Marketocracy Technology Plus Fund (TPFQX), whom I met in Las Vegas, said his biggest wager against high expectations is a short position in cellular carrier Nextel Communications Casinos are required by gaming law to publish the odds of success in all their games so that players can have a scientific assessment of their low likelihood of success if they choose. Its a shame that brokerages dont take their lead and publish odds based on legitimate actuarial assumptions that their analysts growth estimates will ever be fulfilled. To find more large companies whose P/E multiples represent potentially overly optimistic gambles, I screened the MSN Money database for stocks with forward P/Es at least twice as high as their estimated growth rates. If you own any of these names, its worth taking a moment to ensure that youre comfortable paying up for high-growth assumptions -- and not just betting black or red at the markets equivalent of the roulette wheel.
*2002 estimated price-earnings ratio/estimated 2002 growth rate Fine Print Lakshman Acuthan, the economist whose views I have relied upon for this column, said he saw nothing in last weeks unemployment report to shake his view that the economy is experiencing a durable recovery. He said the rate of change of job growth is positive, recovering from very negative readings in the fall and mildly negative readings in the early spring. . . . McEntires mutual fund has only $1.6 million in assets, but it ranked among the top 5% of all technology funds last year and this year. While Jon Markman cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to 7jonmail@microsoft.com. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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