Bubble Watch #(we’ve stopped counting)

Bubble Watch #(we’ve stopped counting)

In addition to the record prices for collectable cars, the art sales at multiples of auction house estimates and the proliferation of car manufacturers revealing passenger vehicles priced at $2 million, there’s anecdotal evidence of mania in all sorts of weird and wonderful places.

One friend of mine told me of a distant mutual buddy who owns a business that typically trades for three to six times cash earnings. He has just been offered more than 20 times! In Hong Kong street side banana vendors are trading stocks.

Also in Hong Kong, Bloomberg reports, “Hong Kong’s small-cap rally is showing no
 sign of letting a little thing like valuations get in its way.
 After a 28 percent surge in April, the Hang Seng Composite
 Small Cap Index is trading at 27 times trailing earnings, [and] volatility…soared to the
 highest in more than three years.
 Cedric Ma, a Hong Kong-based
 senior investment strategist at Convoy, which oversees about
$464 million [said] “What we’re seeing is gains not due to the
 fundamentals or the earnings aspect, but more on the macro 
environment.”
 The Hong Kong small-cap gauge surged 33 percent since March
 27 through Monday.”

Last week, the Sydney Morning Herald reported, “The Shanghai Stock Exchange’s daily turnover exceeded that of Wall Street’s New York Stock Exchange for the first time in its history last month.

“Price-earnings ratios (a valuation method for shares), particularly for riskier small-cap stocks, are looking stretched by conventional measures, prompting concerns over whether prices are entering bubble territory, or at the very least, whether the market’s stellar bull run is sustainable.

“Investors continue to pile in at an increasing rate. Five million new trading accounts were opened in March. And, just last week, another 3.3 million new share accounts were created; 10 times more than normal. The amount borrowed by investors to purchase stocks has quadrupled from a year earlier, fuelled by a recent surge in margin trading, which, in turn, is often funded by China’s infamous shadow lending sector.”

In the US, milkshake bars are trading at heady premiums. Shake Shack Inc. is on a Price/Earnings with four digits having rallied 250 per cent from its initial public offering price in January. Small takeaway joint chains like Noodles & Co. and Potbelly Corp., with first quarter earnings of just $2 million combined and earnings unchanged from a year earlier in the case of Noodle & Co are trading at extraordinary prices. Noodles & Co, selling macaroni and cheese, Pad Thai and stroganoff on noodles, is at 43 estimated earnings for the next 12 months, while Potbelly who sells…wait for it…sandwiches(!) is at 51 times.

McDonalds, whose turn around strategy hasn’t inspired investors, is itself on almost 20 times.

Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery, find out more.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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