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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Ausdauer who wrote (2598)6/12/1999 12:05:00 AM
From: Mike Buckley  Read Replies (1) of 54805
 
Aus,

"The impact of changing interest rates affects only the vertical axis (returns) and not the horizontal one (Competitive Advantage Period). So changes in interest rates affect all stocks the same." From page 95 in the manual.

Though Moore and his co-authors didn't make any attempt to distinguish between companies with various amounts of debt or cash position, they do discuss the impact of better execution on page 97. They show that better execution has only a modest affect on the stock price because better execution only affects the rate of return during the CAP. It doesn't alter the CAP itself.

To the extent that the balance sheet is a function of execution, there are some inferences we can draw about increased debt. If the debt is used successfully to leverage all of the company's resources, better overall exeuction will be the result. (That's the main reason so many rapidly growing high-tech companies use convertible debt.) On the other hand, if the debt is a symptom of many miscalculated steps by management, we're looking at relatively poorer execution.

In summary, the impact of interest rates on a company's performance is a lot more complex than merely measuring the change in the company's cost of debt or the company's increased earnings from short-term investments.

--Mike Buckley

P. S. Probably more than 200 words. Didn't take the time to count. :)

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