Be careful about investing in stocks that have large premiums built into their share price.These are high-risk stocks and there are a number of them in the market.
If for some reason market confidence in these stocks is attacked or under threat, then hopefully you are not holding these shares when theprice takes a dramatic drop.
Market confidence can be attacked from many different areas. To name a few such as: downgrading debt rating; downgrading profit forecasts; world market parameters such as depressed market conditions with declining prices (metals, oils etc), economy growth rates; industry factors, new technologies replacing existing markets, poorly conducted growth strategies of companies both in capital, funding and returns; political factors etc.
When confidence in a Company is attacked, the Company is very closely analysed and scrutinised and this often leads to a downgrading in support and thus results in a reducing share price.
There are currently a number of examples of financial collapses from "OVER Priced" Companies and "more" coming. Northern Rock (UK); Carlyle Capital (Netherlands) and Bear Stearns (US). With Bear Stearns the partial (39.5%) take over offer of $10 per share on 25th March 2008 from JP Morgan Chase is more than 80% less than the traded price ($75 range) in early March 2008. In the deal the US Federal Reserve subject to certain terms also guaranteed $29 Billion of Bear Stearns loans.
There are a number of Large Public Companies that have substantial premiums built into their share price. How many companies do we know of that can continuously increase their Net Operating Profit After Tax (NOPAT) year after year. If we knew that some of these companies have to increase their NOPAT by more than 10% for the next 10 to 15 years wouldn't we be taking a closer look and a more detailed assessment?
To identify Companies with Large premiums you need to be able to: -
The company that I have used as an example is a large public company. Some figures have been altered so as to hide its' identity, although the Growth Premium and NOPAT indicator figures have basically remained unaltered.