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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: sditto who wrote (30531)8/27/2000 5:55:00 PM
From: Seeker of Truth  Read Replies (2) of 54805
 
You have done many people a great favour by your post. I too was aware that the P/E to Growth ratio isn't a linear measure of value. E.g. a stock selling at 100 times earnings but growing at a 50% rate is deemed to be twice as expensive as a stock selling for 10 times earnings and growing at 10% a year. However the first will increase its earnings in 5 years by 659% whereas the "cheaper" stock will only increase its earnings by 61% in the same 5 years. Evidently the stock with the higher PE/Growth ratio was in fact cheaper. There is of course a big caveat. We don't know for sure how long the 50% will continue and we don't know for sure how long the 10% will continue. We need some further perhaps nonquantifiable facts relating to the probable future of the two companies. These are the gorilla characteristics, which we don't need to repeat here. However, suppose we are comparing two gorillas in of course two separate domains. How can we decide if GMST is cheaper or dearer than CSCO? I submit that the net profit margin, i.e. net income/revenues is a good number which may be a useful surrogate for patents/value chain/proprietary architecture etc. If we use the ratio PE/profit margin we obtain a figure which is of some interest. What do you think? This makes GMST look distinctly cheaper than CSCO. I personally hold both and am locked into CSCO by Canada's 40% tax on capital gains, so for me this is only a theoretical exercise but it is one which may prove useful for everyone, sooner or later. Almost invariably the company growing at 10% has a lower profit margin than the one growing at 50% so this is a way of numerically incorporating the bold guess that stocks with a high profit margin are more likely to maintain their growth rates. Of course this is not true for cyclic stocks. But gorillas are not cyclic.
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