Feb 12, 2021 4 min read

Last week, we discussed what was happening in the stock market with GameStop. The price per share since has come down dramatically from the crazy highs during the short squeeze. The hedge funds have covered their short positions, so there is no need for them to buy stock.

The current price per share is probably not justified by the fundamentals of the company financial’s performance. Once investors realize that very few people are interested in a stock, the price most likely will fall as people begin to sell to reposition their investments.

Price earnings ratio is a measurement of a stock’s earnings per share compared with the stock price. It is sometimes used to get an idea whether a stock is priced appropriately. Historically, PE ratios were often in the neighborhood of 15 times earnings. If you thought a stock was exceptionally good, you would accept a little higher ratio, and if less desirable, maybe a little lower.

Would you be interested in a stock that, on Dec. 7, had a PE ratio of 92.84? That means at current earnings, it would take more than 92 years to get back your investment. All of this return would have to come from capital gains, because this stock pays no dividend.

You may have heard of this stock. It was Amazon.

How about Uber, another technology company in the transportation business? It is great if you travel a lot. Uber is quicker and less expensive than using a taxi.

It started a division a couple of years ago to deliver food, Uber Eats. I read recently that Uber bought a company to deliver alcohol to homes for $1.1 billion. Uber does not own the vehicles that make the deliveries, only the technology.

Since it was founded in March 2009, Uber has never made a profit. It has no price earnings ratio, yet its market price keeps going up.

Tesla has become one of the highest-valued companies in the world. Its stock is worth much more than Ford, General Motors and Chrysler combined, although Tesla sells a fraction of the number of vehicles the big three do. Last year, Tesla made a small profit for the first time.

A recent study found there was only one other time in stock market history that PE ratios were higher than today. That was in 2000, during the dot.com era. This was followed by two corrections: when the market went down 47.54% in 2002 and down 53.40% in 2008.

It took almost 12 years to recover the losses.

Since then, the market has gone almost straight up on a 12-year bull run. At the end of 2010, the Dow was at 11,559; and at the end of 2020, it was at 30,015.

We hear on the news every day that the economy is doing poorly and we need to go into more substantial debt to get the economy straightened out. Something does not add up.

While Wall Street says earnings are going up, they are nowhere near levels to support these values. Someday, there will be a reversion to norm.

Not all stocks have fared this well, but it is hard to believe we might not be in some kind of a bubble. Many people are concerned and nervous about the situation, afraid that if they take some of their money out of the market, they will miss the next jump up.

Someday, reality will step in. Greed could make a lot of retirements much less desirable than people imagine.

Next week, we will discuss the money cycle and which investors can take the risk.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.