The next wave of bubble is nearly upon us.  FaceBook, LinkedIn and Zynga will all be over-hyped and overvalued.  Learn how to avoid the stock market bust and safeguard your portfolio.

The big news on Wall Street this week was the success of the initial pulic offering (IPO) of LinkedIn.  While social media sites are all the rage today, is there any profit in it for you and I?

The beauty of being a leader in social media, is the monopoly effect.  FaceBook has it  for the mass market, LinkedIn has it for business, and twitter has it for marauding amounts of unusable spamming.

DotBomb

It all reminds me of the last Tech Bubble known as the DotCom Bubble.  Combining over eager public greed, with a solid lack of understanding of the basics of business fundamentals, the swathing masses got their teeth into a good slice of losses.  The U.S. markets have still truly not recovered since the crash in 2000, the last 10 years of stock market returns being essentially flat.  The market was so seriously over-hyped even the “professional” stock market analysts, gurus and advisory brokers believed the rubbish that spewed from their mouths.  When your plumber or postman talks about getting into the stock market for a particular stock being hyped in the news, that is the time to beware.

Every Bubble has a justification.

In the Tech Bubble in 2000, the main justification for the insane hype and lies around the hot tech stocks was thus.  Bricks and Mortar companies are not fashionable anymore, in the future you will not need shops, everything will be delivered via the internet, the internet will change the way we live forever.  While I like the Internet, I also like to shop in real shops and so does everone else.  I still see plenty of shops, bustling cities and towns full of life, nothing changed.

Many of the survivors of the 2000 dotcom bubble have still never recovered and probably never will.  Most of the overhyped companies went bankrupt or were swallowed up for a few bucks by real companies with real earnings and real property

BRCM – Broadcom – Pre Bubble 1998 $8 – Year 2000 High $183 – Today $36.52

YHOO – Yahoo – Pre Bubble 1998 $0.65 – Year 2000 High $125 – Today $16.00

AKAM- Akamai – IPO in 1999 – Year 2000 High $345 – Today $33.66

Let the numbers not the hype tell the story.

In the Liberated Stock Trader PRO Training Course I look at the DotCom Bubble in detail and discuss how to avoid these in the future, whether it is a Financial Crisis / Tech Bubble or the soon to be social media bubble.  But here is one big tip. Use the P/E Ratio.

Take a look at the follwoing chart for Broadcom, it includes and indicator showing the historical P/E ratio.  Remember, Broadcom is still down 81% from its dotcom high.

Chart Courtesy of bigcharts.marketwatch.com

A P/E Ratio of 674, this means Broadcom was valued at 674 times its current earnings.  This means if you owned this company it would take 674 years for it to earn back your money.  So, when earnings fail to materialize fast enough to bring this P/E down, the stock price will have to adjust accordingly.  This means it will plummet, as it did in this example to $7.12 or a juicy 96% loss.

Back to LinkedIn.

A quick look at the P/E Ratio reveals something shocking.

Snapshot from Google Finance May 27th 2011

Yes that does say a P/E Ratio of 2,433.

Would I buy it now. NO.  Earnings (profits) would have to absolutely skyrocket for this company to be actually worth $88.32 per share and frankly I do not see it.  LinkedIn need to fix their revenue stream, business model and fend of any competitors in a market where the barriers to access are very low.

If you hold this stock and had the fortune to benefit from the first days gap up of 100%, good for you, time to think about selling.  In fact your should have sold within the first 90 minutes of trading as the stock price spiked at $122, only to lose 50% of its value within 7 days.

Bubble, Bubble, Pop?

There will be further entrants to the market funded by Angel Investors falling over themselves to get their hands on your money.  More importantly they want their hands on your personal details.  The information facebook and linked in have on us all is incredible, this will enable them to see directly into our personal affairs.  Every App you install, every thing you do, is seen and computed by the App Developers with the main aim of exploiting you for advertising revenue.

Zynga will be next to float, a popular gaming software company, with some decent revenues.  Will it be incredibly overvalued? YOU BET.  Facebook will be the mother of all IPO’s if it does launch.  To be honest I do not see it happening, it is already making huge advertising revenue, has plenty of private investment and is making its Angel Investors (private equity funds) owners very happy.  The only reason to float it would be to skyrocket its valuation (surpassing google due to hype, no doubt ) thus making all its private equity holders multi-billionaires overnight.  How much will you as the independent investor make?  Not much at launch, but over the years you might eek out a few percentage points.

Always have your wits about you, and as Public Enemy once told us…

“Don’t believe the hype”.