you will see boom and bust cycles...just as we probably will in the stock market!
Bill, bite your tongue! The market only goes up. You just buy on the dips and watch your money compound at 30% per year like clockwork. It is that easy.
<g>
Seriously, the scariest thing about the investing environment today is that people have incredibly inflated return expectations. I am becoming more and more convinced that people expect 20%+ (with the emphasis on the plus) returns per year from the market). Valuation, consequently, has been tossed out the window.
For example, CSCO's P/E is 98 x's based on published 2001 (7/01) estimates; their year over year EPS growth is roughly 27%. A 98 multiple gives you an earnings yield of 1.016%. This is on a market capitalization base of $428 Billion. If GAAP would force companies to adequately account for the cost of stock options, one would see the earnings yield calculation fade below 1.0%.
I don't mean to pick on CSCO, but at some point you have to ask yourself what the expectations are and what the ex ante returns are likely to be.
If someone offered you a bond yielding 1%, you would most likely tell the seller to stick it up their behind. Still, the mystical forces that drive CSCO's shares (and many, many others) are just plain happy to own the company that dominates the internet hardware space (I hate the term 'space'). The only logical reason to buy CSCO at these prices would be (aside from covering a short position) to assume that there is a Greater Fool who would be happier than poop to own that "rooter company with them commercials" for a 0.75% earnings yield. [Buy and holders, don't quibble with me here. I can understand your unwillingness to let go of such a wonderful company/performer, even if you may also believe that it is 'temporarily ahead of itself.' The argument that CSCO's reinvestment rate is much higher based on your cost than you can earn in other investments has some merit. Still, for each seller, someone is 'putting fresh money to work in CSCO.']
Let's assume that people think that CSCO will do much better than published estimates. Let's use 35% growth (36% of the P/E!). In five years, assuming the P/E remains the same and the stock price appreciation reflects this 35% growth rate. At the end of year five, CSCO's market cap is $1.9 TRILLION (the FY2001 Budget for the US Government as envisioned by our favorite Oval Office blowee is $1.84 TRILLION).
Wouldn't it seem that something has to give? Even if the growth rate is 25%, using the same assumptions, CSCO will still be a $1.3 TRILLION dollar company in 5 years. That doesn't make an ounce of intuitive sense.
Given, P/E multiple-based analysis is flawed. Many would argue that the company generates or will generate more after-tax cash flow than EPS. I would take issue with that analysis in the broadest sense. In technology, one has to continually reinvest to stay ahead. Moreover, I side with the people who claim that options should be expenses when issued. They are indeed a true economic cost of running a business and should be reflected in the P/L as such.
Does anyone else get nervous that people are as blase about valuations as they are? "Yeah, it is cheap at roughly 70 x's next year's earnings." "Company X trades at 45 x's, which is a significant discount to the group." Everything is mo'mO'MO'mentum.
Mercifully, there is still value throughout the market. I agree with the WSJ (a rarity!) when they wrote that this may be the least expensive overpriced market in history.
Done ranting.
--Duker |
