Paying top dollar for, say, a brand-new Lamorghini Veneno is one thing. But should you buy the most expensive stock in the entire S&P 500 or should you go bargain shopping with the cheapest stock instead?
While Priceline may be the highest-priced stock in the market benchmark S&P 500 index, Amazon is the most expensive stock on a price-to-earnings (P/E) basis. Most investors use a stock's P/E ratio to compare its valuation to other companies.
And, when it comes to P/E, no company in the entire index is as expensive as Amazon; the ratio of its price to its next 12 months earnings is at a whopping 159 times, meaning for every dollar invested in Amazon right now, investors should expect $0.006 back in earnings in the coming year. Even highflying Netflix, which is up 143% in the past year, is trading at a relatively modest 103 times next twelve months earnings.
Meanwhile, on the other side of the spectrum, is Hewlett-Packard, the tech company founded 65 years ago. Its P/E is at an incredibly cheap 8 times forward earnings; investors should expect $0.125 back in earnings in the coming twelve months.
One reason why a company's P/E is high relative to other companies is that the market anticipates higher future growth. That's why some investors use a "PEG" ratio: they take the P/E ratio and divide it by its expected earnings growth rate (times 100 since growth rates are in percentage terms). Dividing Amazon's P/E by its next five years' growth rate gives Amazon a PEG ratio of 4. That's twice as much as Hewlett-Packard's PEG of 2, but the spread between the two companies is nowhere near their P/E ratios.
Nonetheless, is Amazon more of a buy than Hewlett-Packard? According to CNBC contributor Gina Sanchez, founder of Chantico Global, Amazon is the better bet.
"Usually, I love cheap stocks but, this time around, I think Amazon is the choice between Amazon and HP," Sanchez. She sees the company's long-term growth prospects as more promising.
"If you look at the forward growth, you're talking about 237 million subscribers," say Sanchez. "And, Amazon is starting to test the ability to increase their price."
"They nearly melted down UPS during the holiday season shipping out all of their packages," says Sanchez. "That basically tells you there is an enormous demand out there. If they can increase prices, it's a more interesting story."
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, likes both stocks on a technical basis but thinks one is going to have a tremendous move up.
Though Amazon's stock dropped $57 at the start of the month, it was able to stay above its 150-day moving average support level. "This reminds me of Tesla on that big pullback and we all know how that worked out to the upside," says Ross. "I think Amazon will resume that bull trend in earnest. I would be a buyer right here. The fundamentals and the technicals are in alignment. And, with the stock on sale, you want to be a buyer."
However, Ross sees even bigger gains for Hewlett-Packard. His charts show a head and shoulders bottom pattern with the neckline around $30 per share, right around where it has been trading the past several days.
"If we can move above that neckline in a little more decisive fashion," says Ross, "it sets the stage for significant upside. I think this stock can trade $50 a share."
Ross didn't reach his $50 price target for Hewlett-Packard arbitrarily. It's based on the distance from the "head" of the head and shoulders bottom pattern (in the case, the October 2012 low around $11.71).
"The neckline of resistance is right up around here, $30," says Ross. "That's $18 from top to bottom. We project that out from $30 and that brings us right around to $48. And, $50 is just a big round number so we're going to give it a couple of bucks for, you know, why not?"
For that reason, Ross is more of a fan of HP and, given a choice, he would choose Hewlett-Packard over Amazon. However, he also thinks Amazon is a good buy.
"Given that Hewlett [Packard] can go from $30 to $50, I guess that would be my call here," says Ross.
"But, I do like Amazon on this pullback."
To see the full discussion on Amazon and Hewlett-Packard with Sanchez on the fundamentals and Ross on the technicals, watch the video above.
- Investment & Company Information