Excellent posts on valuation, Mike. It's an interesting development taking place over the past few years in the investing community. That being fundamental analysis versus technical analysis. Regardless of what we each think, they are both here to stay. The fundamental analysis crowd on Wall Street has been preaching all year long about the disconnect between stock prices and earnings. The technical analysis crowd have been in disregard for the fundamentals and simply going with the flow. The flow was up and then, obviously, it was down. Those comments are obviously an oversimplification, but summarize what is at work.
I read an interesting comment regarding this yesterday from Laslo Birinyi in an article at Forbes.com which I feel is worth a quick skim if you have time:
forbes.com
In addition, I have on a few occasions provided the link to MarketPlayer.com where you can type in a stock ticker symbol and click on the 'stats' to get a good visual of historic stock price and how it is trading in relationship to the forward 12 months earnings estimates. Mike, you brought up a good point about the publicized revenue growth estimates that we see are usually 'low balled' these days. EPS might be a little more closely guided from the CFO's. Likewise, most managements will give guidance that is 'low' as well going forward.
I listened to the Brocade Communications conference call Wednesday night where they guided for revenue growth of 2.5 times this fiscal year for next. When an analyst questioned this as being slower sequential growth than this year, CEO Reyes said in a firm tone something to the likes of "I'm going to say this only once for all of you and let me make it clear. It is our firm belief to give conservative guidance and then exceed that guidance." That is a paraphrase, but more or less the message he was saying to the analysts. Therefore, it is easy to see why the flexible use of gauging growth both in revenues and in EPS can make the excercise of nailing down a PEG forecast. This, in turn, makes the difficulty for us as investors to nail down a 'valuation'. When you have companies growing at 100, 200, 300, 400, 500+% y/y in industries where the 'pie' for the next three to five years is 3, 4, 5, 6 fold the revenue base that it is today, it's interesting to see 5 year growth estimates of 40 - 50% used in calculating. Couple that with companies purposely using conservative guidance and it is difficult to get an accurate handle on the 'right' price or valuation for a company.
I don't know if that is why there are a plethora of people in the investment community that contend everything is 'priced' in the stock at any given time or not. There are a few investors over at the Fool that, after presenting the margins, revenue growth, EPS growth, cash flow, debt ratios, etc... that will simply counter with the comment "what's any of that go to do with the price of the stock?". They believe that it is all supply and demand of the equity and prefer to watch the 'charts' or the data flow or money flow to determine a price for the equity. Hence, we get the two schools of thought. According to the premise that The Gorilla Game was written for those of us that are retail investors, I continue to believe that the fundamental analysis and paying attention to valuations was the choice they were aiming to illustrate. Likewise, the 'undervalue' part that the market awards gorillas has, as Moore mentioned on the listserv, seen that taken away this year in the euphoric run up. Yet, now we have some trimming of valuations combined with three more quarters of growth which presents some interesting opportunities for the longer term investor.
In spite of all of that, we've seen 24 months of investing that combined a lot of forces that culminated in a 'historic' market event. A campaign of euhporia on the way up and a campaign of fear on the way down. A classic example of sentiment leading the 'game'. It's rather difficult to address the question that Apollo added to the survey of 'greatest mistake' for the year because the event that transpired had an effect on all investors - experienced, semi-experienced and new as well.
I would stand by Mike in encouraging continued attempts at discussion of valuations for the companies that we follow. Qualcomm at $200, JDS Uniphase at $153, i2 at $223, Siebel at $119, Sun Microsystems at $129, Network Appliance at $152, Gemstar at $107, Microsoft at $119, Intel at $75, EMC at $104, Cisco at $82, Oracle at $46, Bea Sytems at $90, PeopleSoft at $50, Broadcom at $274, Brocade at $267 all seem so long ago in $$ terms if you held through it all. The euphoria and sentiment took them all out and away from the fundamentals. The good news is that a lot of that euphoria has been removed and these companies are all growing revenues and earnings to a healthy degree. That's not to say that growth will be 'tempered', but just take a look in the manual on the Cisco case study and see the type of revenue growth that Cisco enjoyed during 1990 - 1994. These were clearly years of 'slower economic' growth, yet when the demand for a technology that 'fixes' a 'broken' problem appears, the technology enters the market place.
There was an interesting post on the Siebel board to a Wit Soundview .pdf after they recently interviewed corporate CEO's plans for IT infrastructure spend going forward. The report highlights the software infrastructure/network application spend specifcally and shows how they feel concern is overblown by the market's sentiment. I took the time to listen to the conference calls of Bea Systems, i2 Technologies, Siebel Systems, Ariba, Veritas on the software side and Brocade, Juniper, Broadcom, Extreme, Redback, Emulex, Cisco, PMC-Sierra, Finisar, Sycamore and a few other on the hardware side. John Chambers and many other CEO's said they see strong demand for network applications next year. Some of the managements said they actually see an 'urgency' for their products in spite of any economic conditions. Mike, you address that well in your post about Siebel's CRM implementation seeing beneficial results in short order. The hardware companies see the demand being driven due to the network applications. The component suppliers see no slow down in demand.
witsoundview.com
In spite of all of that, the 'voting machine' we know as the stock market has 'voted' and the campaign of fear spread throughout has snowballed the sentiment in the downward spiral direction. I continue to believe that we will see a 'recount' of that vote as we move through the future. If there is any message here, it is that in spite of all the pain we just went through and are going through, the future is most likely not quite as gloomy as the fear campaign suggests.
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