There's been considerable discussion lately about QCOM and its current
valuation. Many on the thread can't believe the extent of its recent
decline. But as LTB&H investors, you need to remember that "fair value"
is a relative matter, and largely a function of your intended
holding period. You should also remember that the average investor of
late only holds a stock for 51 days. Institutions are only slightly
better, with an average holding period of a little less than nine months.
So how does the length of your intended holding period affect your
perception of "fair value"? This is how I look at it...and I believe
pretty much in line with the Warren Buffet philosophy. (He claims his
favorite holding period is "forever" <G>)...
I'm sure many of you may view this as "old school" thinking,
but whenever you buy a stock, you are really buying one thing --
its current and future earnings. And it really doesn't matter if
the company makes computer chips or potato chips, because when all
the hype and dust clears -- what you are left with, is that company's
primary ability to produce earnings.
Some would argue that cash-flow is a better measuring tool, and I wouldn't
necessarily disagree. But all cash-flow basically is, is earnings plus
taxes, interest, and amortization/depreciation -- but the core number
of a company's cash-flow is still it's earnings.
And if you're truly a LTB&H investor-- and considering buying stock
in a company -- the first question I think you should ask yourself
is..."How long will it take for me to get my investment back?" In
other words, how long until the company generates earnings to equal
the initial investment cost. Or, a hybrid question might be..."How
many of my investment dollars will be 'returned' (via earnings)
in five years -- in ten years?" Those are what I assume as the most
likely "targets" of LTB&H investors.
And when you arrive at that answer, the very next question you need to
ask yourself is a comparative one..."What if I did something
else with that money instead?" And for me, the most sensible
comparison is an alterate investment in an S&P500 index fund.
So to do a comparison, we need two sets of numbers -- for QCOM and the
S&P500...their current earnings, cost-per-share, and estimated
future rates of growth. For that I turn to the Quicken financial
site for some concensus numbers.
Now you may agree or disagree with those concensus numbers -- that's what
makes a horse race -- but you can use whatever numbers you prefer.
The concensus of analysts put the S&P500 five-year forward growth rate
at 12.8%...and QCOM's at 35.3%. QCOM is selling for $60 a share, and
estimated to earn $1.07 this year...and a dollar of earnings
of an S&P500 index fund should cost you roughly $25.06.
So first -- using those numbers -- let's look five years out...
..........PROJECTED EARNINGS COMBINED
Grothrate 2000 2001 2002 2003 2004 TOTAL/ Price = % Return
qcom@35.3% 1.07 1.44 1.95 2.65 3.58 10.69 $60.00 17.81%
S&P@12.8% 1.00 1.12 1.27 1.43 1.61 6.43 $25.06 25.65%
What this should tell a LTB&H investor with a five-year horizon is
that QCOM is over-priced. For him, "fair value" would be...
17.81%/25.65% X $60 = $41.66
In other words, you could pay only $41.66 for QCOM growing at 35.3%, to
duplicate an equal investment in an S&P500 index fund growing at 12.8%.
So let's look at a ten-year horizon using an extension of those same
growth rates...
....................PROJECTED EARNINGS COMBINED
2000/2004 2005 2006 2007 2008 2009 TOTAL / Price = % Return
qcom $10.69 4.84 6.55 8.86 11.99 16.23 59.16 $60.00 98.61%
S&P500 $ 6.43 1.82 2.05 2.32 2.62 2.95 18.19 $25.06 72.58%
So for the LTB&H investor with a ten-year horizon, QCOM should seem
underpriced. "Fair value" would be 98.61/72.58 X $60 = $81.52
The point is, an investor's perception of "fair value" is dramatically
affected by how long he intends to hold the stock. And you also need
to keep in mind that you are in a small minority as a LTB&H investor,
and subject to the moody gyrations and whims of the vast trading majority.
Keep the faith.
"the dodger" |
