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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Uncle Frank who started this subject11/27/2000 11:53:04 AM
From: Mike Buckley  Read Replies (2) of 54805
 
We've seen discussion about use of margin and how it can force an investor to be selling stocks at low prices at precisely the time the investor should instead be buying stocks. Now that the Naz has fallen roughly 40% from its all-time high, there is an understandable impression held by many that the stocks are at bargain prices.

That situation reminds me of a question Frank asked me when I quit the day job. He knew I had pulled about 7 years' living expenses out of the stock market and moved it to cash considered non-investable funds. He asked if I would be willing to put that money back to work in the market if I felt that the market was a steal of a deal. I explained that I would be open to that possibility but I'd have to percieve blood in the streets.

For those of you who might consider using margin to take advantage of the current "low" prices or who might consider using funds needed within the next five years, get out your valuation tools before making that decision. In my opinion, we're no where near seeing blood in the streets.

For a back-of-the-envelope view of valuation, I looked up the PSR of 13 companies widely discussed here:

SEBL 23
EMC 21
CSCO 17
SNDK 6
GMST 34
QCOM 19
MSFT 16
INTC 8
RMBS 67
NTAP 26
ITWO 24
ARBA 59
CMRC 23

Folks, for the most part those are NOT relatively low PSRs. Notice that some of the stocks that have fallen the most still have high PSRs. (NTAP, RMBS, GMST, ARBA etc.) Don't make the common mistake of thinking that just because a stock has fallen a lot that it is undervalued. Forget what the stock price used to be. Instead, do your homework and come to your own conclusion about a company's fundamentals after running several valuation metrics.

--Mike Buckley
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