Maybe this article will help answer the question posed if 'JDSU's growth potential really stack up to a forward P/E of 223'.
It is comical to see these analysts still trying to play by the old rules. There is an old saying in the market that goes like this,
'don't fight the tape'. Anyway here is an interesting few on the divergence between the DOW and NAS,
SJ(1/24): Abreast Of The Market: Nasdaq, DJIA Are Divergent
Dow Jones News Service ~ January 23, 2000 ~ 11:00 pm EST
By Greg Ip
Staff Reporter of The Wall Street Journal
If you suspect technology stocks live in their own world, you couldn't get more proof
than this past week's trading.
For four consecutive days, the blue-chip Dow Jones Industrial Average lost ground,
ending the week down 4%. Meanwhile, on each of those days the
technology-dominated Nasdaq Composite Index rose, finishing up 4.2%. Not in at least
six years has such a divergence lasted as long.
Although it isn't unusual for the Nasdaq composite and Dow to move in opposite
directions on a given day, the occurrence has been far more frequent since the new year
started -- on eight days of this year's 14 trading sessions, or 57%, compared with 28%
on average for each of the previous five years. The ping-pong action has left Nasdaq up
4% on the year and the Dow down 2%.
The reason the Dow and the Standard & Poor's 500-stock index, for that matter, have
been unable lately to rally sustainably isn't a mystery. Concern about inflation and the
Federal Reserve raising interest rates has hurt bond prices, sending yields, which move
in the opposite direction to price, to their highest level in two years. That has hurt
blue-chip stocks, which compete with bonds for investors' dollars. All very predictable.
The question is why the technology stocks, mainly on Nasdaq, continue to defy the
gravitational pull of higher interest rates, contrary to conventional wisdom.
There isn't a simple answer. Oddly, not all technology stocks even are behaving the
same way. Some of the sector's biggest names are treading water; Microsoft (which is
in the Dow and the Nasdaq composite) has fallen as investors question prospects for
revenue growth; Lucent Technologies caved in after profit fell short of expectations; and
America Online's halo has slipped since it announced plans to buy Time Warner.
Rather, the current technology surge is being led by Nasdaq-traded companies most
investors hadn't heard of until a year or so ago: optical-networking companies, such as
JDS Uniphase; software outfits, such as i2 Technologies; and wireless-technology plays,
such as Qualcomm.
"Investors are somewhat lost for inspiration, and clearly the trend has been to go back
to the names that worked in 1999," says Ciaran O'Kelly, co-head of listedstock trading
at Salomon Smith Barney.
The divergence between blue chips and new techs began in the summer. The Dow, after
falling 99.59 points or 0.9% Friday to conclude the week at 11251.71, is no higher than
it was in late August. The S&P 500 is only modestly higher. Both would be lower
without the standout performance of some tech concerns, such as Intel. The main reason
for that lackluster performance is bond yields steadily have marched higher in that
period as the Federal Reserve hoisted short-term interest rates.
By contrast, the Nasdaq composite, after adding 45.89 points or 1.1% Friday to a
record 4235.40, is up 51% in the same period. Fans say tech stocks have defied the
pull of higher rates because they have superior profit growth; but that doesn't quite ring
true. Technology stocks traditionally have fallen harder than the broad market when
interest rates rose, precisely due to their high profit expectations. Rising interest rates
reduce the present discounted value of a company's future profits, and the impact is
greater the further in the future profits lie -- such as with tech stocks. When the Fed
raised rates several times in 1994 and once in 1997, the Dow fell just under 10% on
both occasions, but the Nasdaq Composite fell 14% and 13%, respectively.
Richard Bernstein, head of quantitative strategy at Merrill Lynch, said traditionally
cheaper "value" stocks begin to outperform loftier growth stocks when interest rates are
rising or the profit outlook is brightening for all companies. Both things have happened,
"and it hasn't stopped tech. It's very hard to explain the last five or six months. This is
highly, highly unusual. It would be healthy if people would at least admit it."
Ed Keon, director of quantitative research at Prudential Securities, says he thinks the
trend makes eminent sense. Bonds did their damage last year, as predicted, but only to
those stocks that trade like bonds, he says: those that pay dividends and have only
modest growth prospects. The 193 components of the S&P 500 with dividend yields of
2% or more fell 12.3% last year, for example. But many stocks without dividends and
very high price/earnings ratios are valued less like bonds and more based on investors'
faith that they will be valuable franchises someday. Such stocks "are only sensitive to
interest rates to the extent that investors believe that these higher rates will hurt future
performance."
He acknowledges that this goes counter to the conventional wisdom interest rates hurt
growth stocks disproportionately, but he suggests some technology stocks are in a
growth class of their own. "If you looked at the macro-level projections for things like
wireless communications, broadband and business-to- business e-commerce, you're
talking about markets that reasonable people think will grow by factors of 10 or 20 over
a very short period of time. Twenty-fold growth in a short period of time is nearly
impossible to value based on the techniques we all grew up with."
According to IBES International, which tracks analysts' estimates, the expected
long-term growth rate for tech stocks has risen to 26% from 22% a year earlier.
Expected long-term growth for the entire S&P 500 has advanced to 17.5% from 15%
in the same period, mostly thanks to technology. Even within technology, some
companies' prospects are far more bullish: Qualcomm's earnings are expected to jump
70% this fiscal year, and JDS Uniphase's are forecast to soar 250%. The two
companies together have a value as much as Dell Computer and Compaq Computer
combined, although their combined sales are less than a tenth of the two
personal-computer makers'.
Other analysts are beginning to expand the traditional categories of stocks from just
value and growth to include hypergrowth stocks. Rudolph-Riad Younes, head of
international equities at Bank Julius Baer says in a report "some stocks, especially new
companies with innovative and revolutionary products, are in an ultra-hypergrowth, or
transient state." When such stocks are added to the S&P 500, he says, they are treated
as normal growth stocks, as were Microsoft and Cisco Systems, which in effect
undervalued them. As investors came to realize their true value, those stocks helped the
index soar.
Yet Mr. Younes thinks "transient" companies are being more-richly valued, pointing to
Wall Street's efforts to value Internet and cable stocks on factors other than current
sales or profits and the enormous prices accorded to small, untried companies such as
Sycamore Networks, which went public in the fall with a market value of $20 billion,
although it had sales of only $11 million.
Even more-traditionally minded analysts are reluctant to challenge such thinking given
the current euphoria. "The fact is that every wildly optimistic concept that you can
conjure up has been rewarded," says Byron Wien, U.S. investment strategist at Morgan
Stanley Dean Witter. "So prudence has been punished and I'm not willing to say
prudence is obsolete but it's certainly in remission."
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