Wednesday, June 08, 2011

Sorting the wheat from the chaff

I have mentioned previously that I want to eliminate mediocre stocks from my main portfolio this year, especially as growth companies like Google and Apple are so cheap at the moment.

I am going to do a quick comparison of four companies that I own with a view to selling some of them to invest in Google.

1. eBay

eBay is one of my oldest holdings and I have learnt some valuable lessons while holding it. For example, just because a company recently had a trailing PE of 100 doesn't mean that it must be cheap when it has a trailing PE of 40. By buying eBay when it had a PE of 40 I had little margin of safety when the growth slowed and the fall in the share price was painful. eBay has recovered somewhat and I am now sitting on a 30% loss.

eBay is forecast to earn about $2 non-GAAP this year giving it a 2011 PE of 15 or about 13 if you subtract the cash per share from the share price.

Here is the scorecard:

Growth Potential: 6
Risk: 6 (low score means high risk.)
Valuation: 7

This give eBay a score of 19 out of 30.


Barclays is one of the few British banks that emerged from the Credit Crunch of 2008 with its pride intact. It accepted a large investment from a Middle Eastern fund rather than use government assistance and as a result is still in control of its own destiny. However it is currently a low yielder, still has a lot of bad debt and operates in a very competitive marketplace.

Barclays could earn about 45 pence this year giving a 2011 PE of about 6!

Here is the scorecard:

Growth Potential: 5
Risk: 6
Valuation: 10

So Barclays scores 21 out of 30.


Everyone knows that 2010 was not a good year for BP. However the oil spill in the Gulf of Mexico may end up costing less than analysts feared and the current price of oil means that BP is still making a very sizable profit.

BP could make 70 pence this year giving a 2011 PE of 6.5!

So the scores are:

Growth Potential: 5
Risk: 5
Valuation: 10

Giving BP a score of 20.

And finally the big one:


I have recently written about the monster that is Google. It is huge and it is still growing at 30%. Android is taking off and with the Chromebook Google is trying to access the enormous PC market. There is plenty of growth left for Google.

Google could earn $40 in 2011 giving it a 2011 PE of 13 or 10 if you subtract the cash per share from the share price.

Here are the scores:

Growth Potential: 8
Risk: 7
Valuation: 8

Google gets a score of 23.


Barclays and BP are very cheap and highly profitable. Across the pond Google is cheaper the eBay and growing much faster.

It looks like I should hold on to the British pair for now but consider offloading eBay for Google. Does Google's better score justify the trading cost of changing position? Probably. Google is a growth machine and is much more central to the internet economy than eBay. I have some and I want some more.