PRICE = Expected Earnings X Expected Earnings Growth X Premium X Momentum
When Nasdaq takes a dive, momentum pretty much went to 1 from 1.5. Suffice to say that without momentum, NTAP priced at 90-100 is the same NTAP at 140-150.
Premium for the storage sector as a whole has been about 3-4 X growth. Since a lot of the tech stocks have reverted back to 1-2 X growth, storage stocks will most likely have a 2-3 X growth premium.
Now, the earnings report last night showed NTAP's growth may have peaked last quarter. This will further depress the growth premium in the stock. You suddenly have a stock that may be on the 60% decelarating rate rather than a 100% accelerating rate. This makes a whole lot of difference.
At a 60 cent projected earnings, 60X growth rate, premium of 2, momentum of 1, PRICE using above formula is 72. I would say a good risk to reward entry point would be in the 60's to low 70's. Otherwise, it might be better to buy EMC which might hold up better in this kind of environment.
Disclosure: WAS long in NTAP for the most part of the year. Been moving NTAP money to EMC. Notice that in corrections, EMC and NTAP price are very similar. When momentum comes back, NTAP soars past EMC. |
