In my portfolio, I hold a small position in a small biotech company by the name of Sangamo Biosciences, Inc. (NASDAQ:SGMO). The company has burned cash for most of its corporate life, only has small sales to a select group of customers, and has lost $0.41 per share over the last twelve months with even more losses before that. If you compare Sangamo to a company like Pfizer Inc. (NYSE:PFE), Sangamo looks like a money pit of an investment.
Pfizer pays a 3.5% dividend, Sangamo pays nothing. Pfizer Inc. (NYSE:PFE) has positive earnings and trades for a P/E ratio of less than 20, (NASDAQ:SGMO) has continued to lose money. This list could go on and on, but most investors would realize that this comparison is irrelevant to both companies. Despite both being in the biotech industry, (NASDAQ:SGMO) is a high risk start-up while Pfizer is an established, dividend paying, big pharma style corporation. There is a clear lesson to be drawn here that just because two companies are in the same industry does not make them reasonable companies to compare on an investment basis.
Searching for a comparison
As investors, we love to be able to compare our potential investments to other investments, whether for P/E ratios, growth rates, market cap, or dividend yield. In fact, it’s very natural for humans to want to pick out patterns and act upon them to our advantage. However, sometimes this pattern picking and comparison can lead us to make faulty comparisons as shown in the Sangamo-Pfizer comparison.
This is probably one of the easiest comparisons to deem irrelevant since all investors know, or should know, the fundamental differences between speculative biotech and dividend paying big pharma. But, there is another comparison that follows much of the same pattern as the Sangamo-Pfizer comparison, but this comparison is continually being made.
Silicon Valley is known as a home to technology of the information age. While frequently equated with the latest in computing technology, Silicon Valley is also home to one of the most interesting car companies of our time. Start-up automaker Tesla Motors Inc (NASDAQ:TSLA) has made it a mission to mass produce the electric car and bring it to everyday people.
What started out as an operation that put li-ion batteries in Lotus Elise bodies to create the Tesla Roadster has become a company valued at more than $10 billion as of this writing. Yet, Tesla Motors Inc (NASDAQ:TSLA) still has a long way to go. Its target of 21,000 Model S’ is a substantial increase over last year’s production, but is still dwarfed by the likes of major automakers. Clearly, Tesla Motors Inc (NASDAQ:TSLA) is aiming for strong growth over the next several years, having already built a prototype of its Model X SUV and is discussing its Gen III sedan to be produced in the hundreds of thousands of units.