FWIW, the discussion of excessive PEs or overvaluation, IMHO, has gotten way out of hand in recent days with particular focus on stocks such as ORCL, SUNW, CSCO, and YHOO. The recent Street.com article by a "disinterested" Aaran Task is an excellent example of the mania going on now that argues any stock with a PE around 100 must be overpriced. See if you can thestreet.com
At this juncture, where just about every Naz stock has been taken out and shot, the mindless now are in search of companies that in their opinion haven't had enough taste of the market's recent bad medicine. Some would argue that this necessary for a health "cleaning" of excessive PEs, that all such "excess" must be purged from the market if the market is to reestablish itself on firmer ground. To this, I say "what's your real agenda?"
These intentional manipulators manifest an indiscriminate mentality that is representative of a sick stock market but not necessarily a market of sick stocks. Fundamentally, for the companies identified above to exhibit the PE they now do after such a market upheaval over the past month is testimony to their quality and to investor faith that these companies are going to be the leaders going forward in tomorrow's digital economy. What these nay-sayers don't understand is that any attempt they make to drive down these stocks by instilling fear, as exemplified by such language as "it gotta go lower," that is followed by selling by sheep that fall to their prey, is subsequently met by buying either by these wolves, or by the institutions with plenty of money to invest who are targeting and accumulating favorite core holdings at arguably bargain basement prices.
I believe the foregoing to be the case, and not the converse, because if institutions are truly doing the selling here, it is rare, if not unheard of, for them to bash the stock to drive it down, or to follow the advise of the morons we now see repeatedly in the press and on message boards that say the stock "must go down." Institutions generally hold a longer term view of many stocks, particularly blue chip one. They're typically looking out at least 1-2 years, maybe longer. And in this type of market it is obvious to me what kind of stocks they are buying.
What the nay-sayers fail to realize is that most stocks trade in PEs relative to other stocks, and that in times of downward pressure, the PE relationship between lesser quality investments and higher quality investments is going to widen, not necessarily remain linear. Its a simple manifestation of beta, one of the fundamental principles of risk inherent in an individual stock, which these morons fail to acknowledge.
If in-fact the argument we come from this camp holds up, and the price of these high tech blue chips fall, then what do they think will happen to the other stocks that have already taken major hits? Final answer: there gonna fall even further. Why? Because all stocks need to be priced relative to each other based upon contemporaneous market conditions.
At present market conditions call for a widening of the PE metric between the highest quality stocks and those of lesser or more common quality. When underlying market fundamentals improve this widened variance will obviously narrow and the beaten down stocks will arguably offer a greater upside return in the short term than the presently high PE/lower beta stocks now under attack.
If these stocks can hold up after what the market has delivered recently, IMHO there ain't much more downside that gonna be unique only to these stocks. Any further downside is going to likely to lead to either further deterioration of the overall market, which is just another cycle of a spiraling effect, or a quick rebound.
When cries are being heard to throw out "diamonds and gold bullion" in one's portfolio, I ask how far can a turnaround be? IMHO, any shareholder that is lured into dumping the stocks cited above at this stage of the game is a fool.
JMO. |
