The human zoo

I've been meaning to take a break from writing this blog, to get back to my knitting, as they say, and was well on my way to doing that today, until I read a story about 10 top-rated internet stocks, a story from Investors Business Daily, a trade paper for serious investors that many people just refer to as IBD (for anyone whose had a cat with irritable bowel disease, which is also referred to as IBD, the moniker is an unfortunate one).

But anyway . . .

. . . In the top top-rated slot was eBay, a success story known to many, and a success story transpiring on a scale enjoyed by very few companies in history. eBay is the second great natural monopoly of the information age, right after MSFT and, so, so long as Meg Whitman and the other folks at eBay don't do anything unwise, eBay has a clear shot at being equally ubiquitous, equally powerful, equally profitable, and equally wealthy as MSFT -- or at least something close to akin to being in the same league.

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It's important to note that I am an eBay shareholder and have been for a good long while. It's been a homerun stock for a lot of people, having gone up about three-fold in the last three years, and having not suffered all that badly during the bursting of the bubble.

Now, as noted in earlier posts, this blog is not about touting and de-touting stocks, so this particular piece is not about to tell you about whether it's a good idea to buy or sell eBay shares. It won't do that because that's a decision that is very much dependent on a person's personal circumstances and is therefore not appropriate for a publicly accessed, generically inclined blog. And it also won't talk about buying or selling because I haven't the foggiest idea what the stock will do, and am proud to admit that that's the case and in fact believe that many of the people out there who tell you that they know which way a stock is going to go should not be doing so, for all sorts of reasons.

Nonetheless, it can be very interesting to take a look at highflying stocks, to see how they stack up or, as is sometimes the case, how they hole down. Ands it can very good for a person's financial knowledge and therefore very good for a person's overall financial health to have some understanding of this realm.

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So let's compare eBay to Travelzoo, ticker symbols EBAY and TZOO, shall we? And let's scale them against MSFT.

Here are some eBay metrics:

Market Cap (intraday):	71.27B
Enterprise Value (22-Nov-04)³:	69.87B
Trailing P/E (ttm, intraday):	101.81
Forward P/E (fye 31-Dec-05)¹:	67.62
PEG Ratio (5 yr expected)¹:	2.54
Price/Sales (ttm):	24.07
Price/Book (mrq):	11.79
Enterprise Value/Revenue (ttm)³:	23.41
Enterprise Value/EBITDA (ttm)³:	67.45

Income Statement
Revenue (ttm):	2.98B
Revenue Per Share (ttm):	4.409
Revenue Growth (lfy)³:	78.30%
Gross Profit (ttm)²:	1.75B
EBITDA (ttm):	1.04B
Net Income Avl to Common (ttm):	715.31M
Diluted EPS (ttm):	1.056
Earnings Growth (lfy)³:	76.80%

And here are the same TZOO metrics:

Market Cap (intraday):	1.28B
Enterprise Value (22-Nov-04)³:	1.36B
Trailing P/E (ttm, intraday):	302.69
Forward P/E (fye 31-Dec-05)¹:	102.21
PEG Ratio (5 yr expected)¹:	N/A
Price/Sales (ttm):	48.14
Price/Book (mrq):	137.92
Enterprise Value/Revenue (ttm)³:	47.92
Enterprise Value/EBITDA (ttm)³:	156.1

Income Statement
Revenue (ttm):	28.37M
Revenue Per Share (ttm):	1.488
Revenue Growth (lfy)³:	82.70%
Gross Profit (ttm)²:	17.59M
EBITDA (ttm):	8.71M
Net Income Avl to Common (ttm):	4.76M
Diluted EPS (ttm):	0.26
Earnings Growth (lfy)³:	140.30%

Now there's neither the space nor the time to do all the comparisons, so let's just focus on one:

Probably the most basic metric is the price-to-sales ratio, shown as Price/Sales up above.

This metric says, for the moment, let's forget about profitablity and margins and whatnot, and just look at how much money is coming into the company, because the value of a company has a lot to do with how many people are parting with how many dollars and shooting them into this particular company, because no sales happening = no company, right? So let's take the total of all dollars coming into the company and divide it by the number of shares of stock the company has outstanding, reflecting the fact that owning one share of the company's stock is tantamount to owning that number of dollars coming into each single share of the company's stock.

A typical rule of thumb for price-to-sales ratios, or P/S ratios, is that any company selling at 3 times sales is getting a high valuation, and anything more than that is very high.

Looking at the charts above, you can see that eBay sells at 24 times sales, and TZOO sells at 48 times sales. MSFT, by comparison, sells at 7.72 times sales.

So those are mighty, mighty high valuations for TZOO and EBAY, yes? And, not only that, but, for some reason, the market is valuing TZOO twice as high as EBAY on this metric, and three times as high as MSFT.

So ask yourself: would you rather own one dollop of TZOO revenues or two dollops of EBAY revenues or three dollops of MSFT revenues? It's a good idea to ask yourself that question because all three of those dosings of financial dollops cost about the same amount in the market right now.: for every one dollar of TZOO sales, you could instead buy three dollars of MSFT sales or two dollars of EBAY sales.

Which would you prefer?

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To most people, among the best answers to that last question is this: none of the above. Because, while it can be quite fun to stock-pick for some people, and while it can be quite thrilling when it goes well, most people are far better off never stock-picking because they are better off not investing in single stocks.

Investing in single stocks is something that is good for, and largely a creation of, stock brokers. It's their bread and butter, and oh what wonderful bread and what wonderful butter it can be.

So if you're an investor, ask yourself this: did you follow that P/S discussion above? Intentionally, it was not a step-by-step analysis. It assumed a modest level of knowledge.

Did you follow it?

If not, you probably should not be investing stock by stock, because P/S ratios are among the most basic of valuation metrics, and all but the most hardened technician would acknowledge that paying attention to valuation metrics has its place in that endeavor.

And did you know what the word technician, as used in that last sentence meant?

If not, you owe it to yourself to either learn or to stop investing in single stocks because not knowing this concept is s a pretty indication that you literally do not know what you're doing. And if you don't know what you're doing, odds are that you are feeding the stock brokerage industry well -- doing a lot of trades searching for something that works. And that means that you are betting willy nilly on stocks -- maybe getting lucky here and there and not doing too badly or, if you're like most people, not getting lucky all that often and getting hurt badly in the process.

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But there's good news: there are plenty of ways to be smart about investing, without knowing all this stuff. Yay.

And that's a topic for another day.