Here's a list of the priciest stocks in the market. I call it the "sky-high six."
Quite simply, the ranking features the six stocks that sell for the highest multiple of earnings per share. One purpose of the list is to generate ideas for short selling, which is betting that selected stocks will drop.
Not every company with a stratospheric price-earnings ratio deserves to be sold short. But, in my opinion, most deserve to be avoided.
A price-earnings ratio above 100 is often a sign investors have become infatuated with a stock and lost touch with reality.
To be eligible for the sky-high six, a company needs a market value of at least US$1 billion. Among the 1,213 stocks that qualify, the highest PE ratio belongs to LSI Logic Corp.
of Milpitas, California. (The ranking is based on Tuesday's closing prices.) LSI Logic, whose customers include Sun Microsystems Inc and Compaq Computer Corp, was a leader in putting a microprocessor, memory and logic on a single chip. Last year, it had sales of US$2.7 billion.
This week, Chief Executive Officer Wilfred Corrigan said he expects US$250 million in sales over the next three years from new agreements with Dell Computer Corp. and three other computer makers he didn't name.
LSI earned US$0.02 a share in the past four quarters.
The stock trades at US$19.24, giving it a PE ratio of 962. The average PE ratio for the S&P 500, by comparison, is 45.
You can argue that many PE ratios are high today because earnings are depressed. To deal with this period of declining corporate profits, I devised what I call the "steakhouse PE" and the "malt shop PE."
The steakhouse PE ratio is a company's price divided by its peak earnings, the best annual earnings it has ever had. For LSI, the steakhouse PE ratio is 16, based on the US$1.21 the company earned last year.
The "malt shop PE" is computed by dividing a company's stock price by the third-best earnings the company has posted in the past 10 years. LSI's third-best year was 1997, when it earned US$0.595 a share, making its malt-shop PE ratio 32.
I don't think LSI is a bad company or a bad stock, but its steakhouse and malt-shop p/e ratios are higher than I'd choose to pay.
Electronic Arts Inc, the largest US producer of video game software, earned US$0.06 a share in the past four quarters. At US$54.81, its PE ratio tallies 914.
Electronic Arts' steakhouse PE ratio is 56 and its malt-shop PE ratio is 82. That's a lot to pay for a company in a business as faddish as video game software.
Third among the sky-high six is Viacom Inc, with a nickel a share in trailing earnings and a stock price of US$41.95. That works out to a PE ratio of 839.
Viacom, whose collection of entertainment and publishing properties include Paramount Pictures, the CBS television network and an 82 percent interest in the Blockbuster video chain, has a steakhouse PE ratio of 64 based on peak earnings in 1993. Its malt-shop PE ratio is 98.
Like its rival AOL Time Warner Inc, Viacom is a sprawling empire of companies. Some day, I believe someone will take both empires apart, sell the pieces and make stockholders a lot of money. But my best guess is that such a day is far off.
The fourth highest PE ratio belongs to Medarex Inc, a biopharmaceutical company in Princeton, New Jersey that is working on anti-cancer drugs. Its earnings for the past four quarters were US$0.03 a share and the stock fetches US$22.11.
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