just to clarify (hopefully)...
i wrote:
it is not a risk premium; it is the assumed "expected return".
this is a little idiosyncratic on my part, so i will explain a bit more. risk premium relates to a company's cost of capital. growth companies have a lower cost of capital than value companies (e.g., MSFT, if it so desired, could issue debt at a lower yield than could Ford).
historically, growth companies have underperformed value companies in the SPX because the higher cost of capital for value results in a higher long-term return. (simply put, if MSFT issued debt at 6% and Ford at 9%, Ford debtholders would expect a higher return, although they would be presumably taking a greater risk of default; apply this bond analog to equities and it seems obvious to me why value has outperformed over time).
QCOM, as a growth co, presumably has a lower cost of capital than the market, so it is not surprising if the expected return is low. my point in harping on expected return is that people think low cost of capital means they will get a high return, whereas what it has meant, in general, is that they will get a low return (but with less "risk" than value stocks, according to Fama/French).
unless the market changes severely (or QCOM falls on hard times) i think it is unlikely that QCOM will actually trade down to the point where its cost of capital would raise its expected forward return to a 13% level. which is to say, i don't see how i could expect to make 13% off this stock (other than trading it).
that is why, when i say something like "personal buy-in target price" of $15, it is not that i necessarily think QCOM will actually trade down to that level. rather, that is the kind of buy-in price point at which i would feel confident in a long-term return that beats the market.
conversely, if i only expect a 3% or 5% return at current levels, i feel i can achieve such a return through less risky instruments.
all JMHO, as always |
