Take biotechnology first. Have you been watching the to-ing and fro-ing in the press recently about Viagra, the new male impotence treatment? Pfizer, the manufacturer, is a big US drug company and Viagra has been terrific for its share price. No question. It now trades on a price-to- earnings ratio of around 46, high even for a drug company. But imagine if a small biotechnology company came up with a drug of equal impact - it could happen. Then that company's share price would go off the scale.
A couple of years ago, British Biotech, then the UK's leading biotechnology company, was fuelling a biotechnology share boom. Incredibly, without a drug on the market, it was so highly valued that it was jostling for inclusion in the FT-SE 100 list of the largest 100 companies in Britain. Last year, the share price plummeted after the dismissal of its director of clinical research for publicly disputing the company's claims about one of its drugs under development. From a high of 331p in May 1996, the shares now trade at around 20p.
On to the internet. The papers have been full of headlines recently, most of which are a variant of: "When will the internet bubble burst?" The major internet companies are in the US and most people reading this will have heard of Yahoo! and Amazon. In terms of conventional ways of valuing shares such as the price-to-earnings ratio or the price-to-sales ratio, they are all on insane valuations.
In the UK, any company with even a tenuous connection to the internet has seen its value rise sharply. Dixons, which is about the closest we have to a large public internet company, announced last week that it was to restructure into three separate divisions. One of these will be Freeserve, its successful internet service provider. Investors Chronicle last week rated the Freeserve component overvalued and advised investors to sell the stock.
So, are internet shares heading for a fall? Maybe, but there is a difference between the world of the internet and that of biotechnology. Unlike biotechs, internet companies are shaping the world in front of us. We can see and experience it and form our own opinions. Also, many of them are growing their revenues very rapidly, even if not yet their profits. Most biotech companies don't have revenues, just hope.
Brought into being by the internet itself, you would expect the Motley Fool to be positive about it. We are. But that doesn't mean we're predicting an endless internet share boom. It is an unique situation and it is impossible to apply conventional yardsticks.
In fact, the final criterion for a share to be selected for the US Motley Fool's market-beating Rule Breaker portfolio is that "some significant media source has recently called it overvalued".
Name that company
The first five correct answers out of the hat each week win a super de luxe, black "FOOL" baseball cap.
The Swedes prove themselves in business time and again. Just look at Volvo, Saab, Ikea and Ericsson.
Recently, though, Ericsson, one of the biggest players in the telecommunications industry, has started to struggle. Last week, it announced it will cut its global workforce by 11,000. Ericsson is finding the competition from its fiercest rival increasingly hard to bear. Our question this week is: what is the name of this rival, and which country is it from? E-mail your answer to UKColumn@fool.com or send it by post to Motley Fool Trivia, The Independent on Sunday, 1 Canada Square, Canary Wharf, E14 5DL.
Last week's answer: Bill Gates and Microsoft
ask the fool
Q: Last week you explained what the price-to-earnings (p/e) ratio was, but not what earnings per share (eps) were. JB, London
A: Take a company with 50 million shares, which makes pounds 25m profit after tax. The amount of profit for each share is pounds 25m/50 million shares = 0.5 pounds or 50p. So far, so good. We all want to see the eps of the companies we're invested in grow. It means they are doing better, right? Often, yes, but there can be some wrinkles. For one thing, companies can grow their eps by simply taking over other companies. That's not always bad, but it's worth being aware of what's happening.
Send us your question and if we publish it you'll win a "FOOL" baseball cap. E-mail to UKColumn@fool.com or post to Motley Fool, The Independent On Sunday, 1 Canada Square, London E14 5DL.
my smartest investment
Send us your smartest or dimmest investment story. If we publish it, you'll get a free copy of the "Motley Fool UK Investment Guide". E- mail to UKColumn@fool.com or snail mail to Motley Fool, The Independent on Sunday, 1 Canada Square, London E14 5DL.
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