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Published Thursday, April 12, 2001, in the San Jose
Mercury News
investing
Even with the
market's slump, PE
ratios remain lofty
Numbers are still above historic
average so some stocks will be very
expensive
BY PER JEBSEN
Reuters
Think all stocks must be a steal now that they've fallen so far from last
year's highs?
Think again.
The market slump may have done much to burst the bubble of
momentum investing and Internet-enabled, Pollyanna methods of
valuing stocks. Yet, judging by price-earnings ratios -- the measure of
a stock's price to its earnings per share -- some pockets of expensive
optimism remain.
Both shares of Yahoo and Palm are priced at more than 200 times
their expected earnings, even though their shares have declined almost
90 percent from their 2000 peaks. Eight members of the Standard &
Poor's 500 Index are trading with PEs of more than 100.
``It's hard to say the market is cheap as a whole,'' said Franklin
Morton, director of research for Chicago-based Ariel Capital
Management, which manages about $5.5 billion in stocks. ``The
market with a few interruptions has been going straight up for almost
18 years.''
The average PE ratio for a member of the S&P 500 Index of
America's most valuable companies has fallen to about 19.7 from a
high of 26 during the third week of March as the index dropped 31
percent, according to First Call/Thomson Financial.
Even so, the S&P's ``historical average is about 14, so even after the
fall in the market in the last 12 months or so, the market is still trading
at almost 1.5 times its historic average multiple,'' Morton said.
Shares of Yahoo, the blue-chip Internet media company, fetch 267
times the company's anticipated earnings. Shares of Palm, a maker of
popular handheld computers, fetch 236 times.
The other S&P companies trading at more than 100 times earnings
are: Citizens Communications, a provider of telecommunications and
energy distribution services; Internet consulting firm Sapient; Viacom,
the entertainment giant; ADC Telecommunications, a
telecommunications equipment maker; pulp and paper giant
Georgia-Pacific; and Homestake Mining, an international gold mining
company.
PE ratios remain comparatively lofty even after the market declines in
part because interest rates are low, especially after the U.S. Federal
Reserve Bank's recent rate cuts, said Charlie Crane, portfolio
manager and strategist with Spears, Benzak, Salomon & Farrell. |
