Apple (AAPL) today is hitting $260 with a P/E of almost 22. AAPL’s PE was 11 in early January of this year. Apple is a great company, but price and value are separate issues. Costco’s PE is reaching $307 with a P/E multiple of 37! Costco usually has a high 20’s multiple. Costco is also a great company.
These are two companies I like. Both have financial and operational fundamentals that are really great. The question is would I buy them at current levels? Oh hell no, but I do appreciate those who see them as magic beans. We all know the story of Jack and the Bean Stock (pun intended). Those magic beans are going to grow to the sky!
Anyway, the point is that P/E’s change slowly over a time period. We often compare them to what we have seen recently. This is known as the regency bias. Keeping a perspective on how any metric has changed over time is very important because we all have a tendency toward the most recent and available information.
How quickly we forget the past. The future slowly but surely evolves and with that, the perception of what a value is. That is until we have an “Oh Sh_t” moment and something jogs us back to reality.
Personally, I’m not in the market for magic beans. If it did grow to the sky and I tried to step off on to a cloud, it would be a painful drop!
