The ‘winning’ stocks I won’t be buying at their current inflated valuations

Linda J. Dodson

There are, though, some actual winners in this difficult period. “Winners” here are modestly defined as those that have risen by 5pc or more. Plenty of people have shares in them. I know that partly because they can’t resist telling me about it and how their portfolios are not down at all this year.

So let us have a look at these winners. They are overwhelmingly the huge, fashionable technology companies for which lockdown and people working from home have created moneymaking opportunities.

Prime among them is Amazon, doing home deliveries by the million. I had not previously realised just how big Amazon had become. Its market value is about $1,333bn. Or, to put it another way, more than £1 trillion. That is bigger than the total annual economic output of the Netherlands and much bigger than that of Switzerland.

The question for me is whether the shares of Amazon and other winners such as Microsoft, Facebook and Alphabet, which owns Google, are overpriced or not. I have a vested interest in hoping that they may be.

So what is the share price of Amazon in relation to its profits? Stock markets look towards the future so let’s look forward to the consensus estimate for next year. Amazon’s share price of $2,713 at the time of writing is a whopping 72 times its forecast earnings per share.

Let’s compare that “price-to-earnings ratio” with those of a few “bruised survivors”. I own some shares in the humble British pawnbroking company H&T. At a share price of 322p it has a forecast price-to-earnings ratio of a mere 6.7 for 2021. Or consider poor old battered Lloyds Banking Group. At a miserable 30.8p, the forecast price-to-earnings ratio for next year is 8.1. The contrast is certainly marked.

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