The Current Conundrum

 | Jan 28, 2013 | 2:10 PM EST  | Comments
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nflx

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cat

Amazon (AMZN) and Netflix (NFLX) are making my life very difficult.

It's my job to figure out what to pay for stocks, and what's right and what's wrong. That usually means asking if you should be paying more for safety, like Heinz (HNZ) at 17x earnings or Johnson & Johnson (JNJ) at 14x, than Intel (INTC) or Microsoft (MSFT) at 10x or Apple (AAPL) at 8x earnings.

Or is it better to bet that Caterpillar (CAT) can earn ten bucks and it sells for 9x that number?

But along comes Netflix at 128x earnings and Amazon at 500x earnings and we have to ask ourselves if there really can be two tracks of earnings here. Can we really be willing to pay anything for a handful of stocks and so little for others, like Apple?

This conundrum is central to the stock market right now. I believe what we are willing to do here is not to suspend all judgment about what we will pay for a stock but instead determine that the companies themselves are in growth modes and don't want to be constrained by the spending that makes earnings look more meager than they really are.

In other words, if Netflix were to try to stop expanding overseas and if Amazon were to just declare victory and stop building so aggressively, then we would see the real earnings power and know that the stocks weren't all that expensive.

I like both stocks. But I think you can only get away with the "if they stopped spending they would earn X" argument so many times before running into buying parameters that can't be breached, even as you clearly are leaving gains on the table.

It's far better at this point to say, "These gains from here? They are all yours. I don't have the stomach for them."

And I don't.

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