Let me show you how it's so easy to be wrong.
A friend calls you up and asks for some thoughts on a stock he's about to buy.
"What do you think about Baidu.com (BIDU)?"
You know that it's China's leading Internet search engine, but that's about it. You want to be more helpful, so you ask for a few seconds to get up to speed. You decide to channel your inner Cramer, pecking the ticker symbol into DailyFinance.com as if you were hosting Mad Money's Lightning Round.
"Are you crazy," you fire back when you see that its P/E ratio is 96.4. "The stock's selling for nearly 100 times earnings!"
You look around for some "sell, sell, sell" sound effect to trigger, but you suddenly realize that you're not Jim Cramer. That's the good news.
Unfortunately, you may have just given your friend some pretty bad investing advice.
Cheap is in the Eye of the Beholder
It's true that Baidu isn't cheap. However, this is a fast-growing company. The 96.4 you see is a multiple based on last year's earnings. In other words, in this case, it's the current share price divided by the sum of its earnings per share over the four quarters of 2010. Baidu's profitability is roughly doubling these days, so that figure changes dramatically with every passing quarter.
Looking out to 2012 -- and we're a little more than three months away, so why not -- you see that analysts are targeting earnings of $4.40 a share. Divide yesterday's close by that forecast, and Baidu is really trading for just 34 times next year's projected profitability. It's still not cheap on an absolute basis, but it's a compelling discount for a dot-com speedster that grew earnings by 95% in its most recent quarter.
Investing isn't just about eyeing the rearview mirror. You have to see what's waiting for you on the road ahead.
Hitting the Road with High Beams On
Let's take a closer look at ten companies that may seem pricey based on what they earned last year, but are actually bargains if we look ahead to 2012:
Sept. 14 Close
Last Year P/E
Next Year P/E
Sirius XM Radio (SIRI)
Las Vegas Sands (LVS)
How well do you know these companies?
Sirius XM Radio is the only game in town when it comes to satellite radio. It was losing money until the latter half of 2009, so it's naturally going to have a bloated earnings multiple on a trailing basis. Things get better for the growing media company the further you go into the future.
NVIDIA is a pioneer in graphic chips. The company has adapted as we've gone from expecting great graphics on PCs to stunning visuals on smartphones and tablets.
Priceline is the "name your own price" travel portal. What many people don't realize is that it derives most of its bookings these days outside of the United States.
Las Vegas Sands is the fledgling casino operator that's currently riding high as one of the few stateside gaming companies doing business in the red-hot Macau market.
Crocs makes those rubbery resin shoes that everyone seemed to be wearing a few years ago. They weren't much of a fashion statement, but they sure were -- and remain -- profitable. You can't call Crocs a fad these days, especially given its healthy growth overseas.
Travelzoo runs the "Travelzoo Top 20" email that goes out weekly to roughly 20 million opt-in recipients. Unlike conventional travel portals, Travelzoo is actually a travel publisher, passing on 20 of the best sponsored travel deals it finds. * NetEase.com is one of China's largest online gaming companies. It's also the lucky dot-com that has an exclusive license in promoting Activision Blizzard's (ATVI) World of Warcraft and Starcraft throughout the world's most populous nation.
Ancestry.com runs a subscriber-based genealogy site. Skeptics may wonder who would pay monthly subscriptions to root up family trees? Well, Ancestry.com had nearly 1.7 million members as of its latest quarter, 28% ahead of where it was a year earlier.
Qualcomm is the patent-rich chip designer that has made a mint in the smartphone market. They say that Qualcomm is always expensive, but how can that be when it fetches a forward earnings multiple in the teens?
Finally, we have Apple. The world's most valuable tech stock is also iCheap at just 12 times next year's expected earnings.
So take one more look at the table above. Do these growth stocks really seem all that expensive? When you factor in their heady growth rates and rosy prospects, yesterday's overpriced growth stocks are tomorrow's bargains.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article, except for Travelzoo. The Motley Fool owns shares of Qualcomm, Apple, and Activision Blizzard, and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Apple, NetEase.com, Baidu, Travelzoo, priceline.com, Ancestry.com, Activision Blizzard, and NVIDIA; writing puts on NVIDIA; creating a synthetic long position on Activision Blizzard; and creating a bull call spread position on Apple.
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