Options Trading News

January 29, 2013  Tue 8:42 AM CT

Amazon and Netflix are making my life very difficult.

It's my job to figure out what to pay for stocks, and what's right and what's wrong. That usually means asking if you should be paying more for safety, like Heinz at 17x earnings or Johnson & Johnson at 14x, than Intel or Microsoft at 10x or Apple at 8x earnings.

Or is it better to bet that Caterpillar can earn ten bucks and it sells for 9x that number?

But along comes Netflix at 128x earnings and Amazon at 500x earnings, and we have to ask ourselves if there really can be two tracks of earnings here. Can we really be willing to pay anything for a handful of stocks and so little for others, like Apple?

TheStreet.com logoThis conundrum is central to the stock market right now. I believe what we are willing to do here is not to suspend all judgment about what we will pay for a stock but instead determine that the companies themselves are in growth modes and don't want to be constrained by the spending that makes earnings look more meager than they really are.

In other words, if Netflix were to try to stop expanding overseas and if Amazon were to just declare victory and stop building so aggressively, then we would see the real earnings power and know that the stocks weren't all that expensive.

I like both stocks. But I think you can only get away with the "if they stopped spending they would earn X" argument so many times before running into buying parameters that can't be breached, even as you clearly are leaving gains on the table.

It's far better at this point to say, "These gains from here? They are all yours. I don't have the stomach for them."

And I don't.

Disclosure: Cramer's charitable trust is long AAPL.
Share this article with your friends

Invest Like a Monster - San Antonio: October 9-10


The fastest money in the market
View full report »

Premium Services

Archived Webinar

Education & Strategy

Options Academy: More on the Covered Call Strategy

Last week, we talked about the Covered Call and the misconceptions that surround it. We spoke about how an investor must realize that the Covered Call is actually a premium collection strategy and not so much a directional one. If an investor can grasp this idea, the investor stands to do a heck of a lot better in the strategy than they currently do.

View more education articles »