When you retired you stopped working... and collecting a salary. That may sound like an obvious statement, but it's vitally important to the rest of your life. It's why you need to start thinking about investing in a different, more conservative, way. It's also why Tesla Inc. (TSLA 1.22%), Netflix Inc. (NFLX 1.71%), and Amazon.com Inc. (AMZN -0.50%) are three terrible stocks for retirees. Don't believe me? Check these stats out.
What did you pay?
There can be a big difference between a great company and a great stock -- and the gap is usually summed up in the share price. Even a fantastic business bought at too high a valuation is a terrible investment. Consider, for example, the "Nifty Fifty" craze of the 1960s and early 1970s: Investors thought blue chips like Johnson & Johnson and Disney could go nowhere but up. At the Nifty Fifty bull market peak, the S&P 500 Index's price-earnings ratio was around 19, while that select group of top large caps had a P/E of around 42!
Image Source: Getty Images
Those lofty valuations just couldn't hold. Johnson & Johnson, for example, never stopped being a great company, but its stock price still fell roughly 40% between 1973 and 1979. And let's not forget about the 2000 tech bubble that drove the prices of companies that really were changing the world up to unsustainable heights -- think Microsoft and Intel -- until it popped, and they plummeted back to Earth, taking the entire stock market with them. And those are actually tame examples.
The point is, overpaying can turn shares of even great companies into bad investments. Which is why I'm not going to pass judgment on the quality of Tesla, Netflix, and Amazon. I'm even happy to concede that the CEOs of these three companies are visionary geniuses. What I'm worried about is their valuations, and the risk that buying these stocks today is locking in a high price that will ultimately sap the value of your nest egg.
How much for the puppy in the window?
Let's start with Tesla. The electric car and solar power innovator can't be valued by traditional metrics like P/E ratios, for the simple reason that it doesn't make any money. Perhaps someday, Tesla will have earnings, but until that point, you are buying on the hope that it will eventually turn a profit. So how does one value Tesla shares? One way is to look at the price-to-sales ratio, a measure that allows us to compare unprofitable companies to profitable ones.
TSLA PS Ratio (TTM) data by YCharts
Tesla's price-to-sales ratio is around 5.6 today after a more than 17% drop from recent highs. That price-to-sales ratio is actually down from its five-year average of 11.6, but it's still excessive. For reference, the S&P 500's price to sales ratio is around 2.1, and automakers Ford and General Motors have a price-to-sales ratio of 0.3.
But maybe you view Tesla less as a car company and more as a tech company. Even Apple, the largest and perhaps most celebrated technology company in the world, has a lower price-to-sales ratio -- it clocks in at 3.5. If you are buying Tesla today, you are buying an expensive stock.
Netflix is easier to get a handle on because it has earnings -- and a P/E of nearly 200! The P/E for the S&P is around 21. Think about that for a second: Netflix is trading at a P/E that's roughly 10 times higher than average large U.S. stock. Its price-to-sales ratio is likewise high at 7.1, which is well above the company's five-year average of 4.6. It's also more than three times larger than the price-to-sales ratio of the S&P. By either measure, Netflix is anything but cheap.
On to Amazon, which has just agreed to buy Whole Foods Market in an attempt to disrupt yet another segment of the retail industry. Amazon's P/E is a huge 187. Oddly enough, on a relative basis, that probably makes Amazon the most reasonably priced stock on this list. That said, the struggling retail sector has an average P/E of only around 44. Amazon's price-to-sales ratio, meanwhile, is also the lowest of this trio at 3.4. However, that's up from a five-year average of 2.2. Although Amazon may be the bargain stock here, it's definitely not inexpensive.
Be careful with those nest eggs
Once you are retired, you don't have the same ability as you used to bounce back from financial mistakes. Buying even great companies at too high a price is just too risky a move. Tesla, Netflix, and Amazon may be the best companies ever created, but they are also quite obviously expensive today. If you are retired, don't be tempted by the stories behind these stocks -- the risk of overpaying is just too high.
