Investing 102

[GregWeld]

#1 --- Erik --- Chipotle Mexican Grill (CMG) is "expensive" now - but 10 years from now you'll look back and wish you'd bought more of it. They have lots of room for growth - their stores a PACKED - their prices are higher margin - it's healthy compared to a burger and shake... and it's super tasty! I'm a fan.



#2 --- LOTS going on around the world... 15 years ago I'd have been "reacting" to all of it... I'd certainly have sold or been in and out multiple times in recent days and weeks. Now days I read, and listen to the talking heads on TV, and I shrug my shoulders and yawn... Then I open up my account and see a bunch of dividends have been paid and I go play golf or polish a hot rod.

[GregWeld]

Here's an interesting comparison of what $100 buys PER STATE.... Sucks to live in California!! LOL



https://patch.com/california/walnutc...-go-california

[Vegas69]

Originally Posted by GregWeld

#1 --- Erik --- Chipotle Mexican Grill (CMG) is "expensive" now - but 10 years from now you'll look back and wish you'd bought more of it. They have lots of room for growth - their stores a PACKED - their prices are higher margin - it's healthy compared to a burger and shake... and it's super tasty! I'm a fan.



#2 --- LOTS going on around the world... 15 years ago I'd have been "reacting" to all of it... I'd certainly have sold or been in and out multiple times in recent days and weeks. Now days I read, and listen to the talking heads on TV, and I shrug my shoulders and yawn... Then I open up my account and see a bunch of dividends have been paid and I go play golf or polish a hot rod.

I'm still pretty green at this. How the heck does Chipolte demand $600 a share where say CVS demands $100? Or Starbucks demands $80? Is that an indication that it may split?

[JKnight]

Share price = firm value divided by shares outstanding

So it could simply be a matter of CMG having fewer shares outstanding and isn't necessarily indicative of likelihood of a split. I always say share price is arbitrary. A 10% gain on your investment in a stock is the same amount of $ regardless of share price. That said, firms understand the psychological impact of having a high share price, and they are incentivized to have people buy, so it could be indicative of a higher likelihood of a split.

So to answer your question...maybe

[GregWeld]

Originally Posted by Vegas69

I'm still pretty green at this. How the heck does Chipolte demand $600 a share where say CVS demands $100? Or Starbucks demands $80? Is that an indication that it may split?

Chipotle Mexican Grill (CMG) has a Price to Earnings (P/E) ratio of 41 --- so people are paying 41 dollars for each dollar of earnings (currently) for this stock. A high P/E ratio often reflects the "EXPECTED" growth of the earnings in the FUTURE of the stock.

Spits are more about whether or not the BOARD is prone to splits. Some boards are and some aren't. If the shares split - it doesn't increase (or decrease) value - there's just more shares at less value per share. People get excited about them and sometimes that drives new money to the shares. Netflix (NFLX) is splitting 7 for 1 --- it trades for $700 a share - so if you had 100 shares at $700 each - you'll just have 700 shares worth $100 each. This often "fools" small investors into finally getting into the shares because they're now "affordable" - which is complete nonsense....


CVS Health Group (CVS) has a P/E of 26... which just means (or can mean) that it still has a quite high expected growth rate of it's earnings. The average P/E is "normally" closer to 15..... and the "pros" start talking about the market being overvalued when it starts to hit 17ish. In a Bear market period - you'll see average P/E's in the 12's...


Starbucks (SBUX) P/E is 32.... a still "high" expected earnings growth rate.


Now -- so as not to confuse -- let's see how many SHARES each of these three have 'outstanding'.



SBUX - 1.5 BILLION shares.... Earnings PER SHARE $1.70

CVS - 1.13 BILLION shares.... Earnings PER SHARE $4.10

CMG - 31 MILLION shares.... Earnings PER SHARE $15.38



The key is --- what do you think a company will be earning in the years ahead --- or what their growth rate is etc. Like any "market" - how many people want to OWN something versus SELL something.

Beware high multiple P/E stocks IF they manage to not live up to the expectations.... you get killed overnight!

[Vegas69]

Good stuff, thanks for the insight fellas.

[JKnight]

Greg brought the "tech" for sure. I didn't want to look up all the data on my phone he quoted above. As usual, he brought great info. Really shows how a share price can vary just because of the shares outstanding, not necessarily because of a fundamental superiority in the company.

Greg's point about "expected" growth is what it's all about, for better or worse. Can't emphasize enough how important that observation is.

[Vince@Meanstreets]

Originally Posted by Vegas69

I'm still pretty green at this. How the heck does Chipolte demand $600 a share where say CVS demands $100? Or Starbucks demands $80? Is that an indication that it may split?

thats what im hoping for.

[GregWeld]

Originally Posted by JKnight

Greg brought the "tech" for sure. I didn't want to look up all the data on my phone he quoted above. As usual, he brought great info. Really shows how a share price can vary just because of the shares outstanding, not necessarily because of a fundamental superiority in the company.

Greg's point about "expected" growth is what it's all about, for better or worse. Can't emphasize enough how important that observation is.

So let's touch on the OUTSTANDING SHARES issue.


Like most things in life... when something is "rare" - that rarity creates value - unless it's an Edsel - in which case it's rarity stems from it being FUGLY - Nobody wanted them when they were new - and for the most part - nobody wants 'em now either - so let's discount some things that are/could be classed as "rare"..... let's stick with RARE AND COVETED.

Microsoft (MSFT) has the highest number of shares outstanding of any publicly traded company. The number of shares outstanding is 8.09 BILLION shares. It's P/E is 18.

Let's compare that to Chipotle Mexican Grill (CMG) which has a whopping 31 MILLION shares outstanding.


8,090,000,000.00 --- NINE Zeros vs
31,000,000.00 --- SIX Zeros



Lots of people and institutions own MSFT.... but in order for MSFT share price to "move" -- there has to be more people wanting to buy than wanting to sell. It's a well established company with a long historical growth and track record of earnings. Using well established "metrics" such as P/E etc... it should trade for "normal" prices given it's size and growth rate.

Here's where we get a variance --- take a Chipotle (CMG) --- it's a relatively new company - has a very high growth rate - has lots of opportunity to open more locations - they're all company owned (this is not a franchise opportunity) - so all the growth flows directly to the company - as well as quality control etc. Add to this the smallish "float" of company shares.... and the demand placed on those shares by people willing to bet their money that there's more growth ahead... and you get the 41 P/E reflected in the share price.

There's two ways for shares to become more valuable (in it's most basic description as there are OTHER ways for them to increase/decrease in value).

#1 - Expansion of the P/E. If people are willing to pay 40 times earnings per share vs 20 times earnings... then the price of the shares increase.

#2 - The company's EARNINGS increase. So if they made $1 per share and they suddenly announce that they're going to make $1.50 per share this year - and think they're on their way to making $2 per share next year.... guess what?? The CURRENT P/E (let's say it was 16 times) - will suddenly expand to reflect NEXT years earnings.

You'll hear this expressed on TV as "TRAILING" earnings (P/E based on history) versus "Forward earnings" (based on the projections/possiblities).

[glassman]

Thanx Greg. Put in layman's term for us (like me) who need that. Listening on TV is too fast for my brain to absorb what their saying, and some of them use big words to feel "bigger" and they miss the true explantion/meaning to their audience...