Frank,
To be honest, the only way I'd be able to recognize that a compelling valuation had existed is in retrospect.
Rear-view mirrors are indeed invaluable when appreciating value. :) I do think, though, that there are in the very least some infrequent situations in which valuations can make a compelling case for a Gorilla or King.
Just a week ago I mentioned that Siebel at $60 was probably the first time in a long while that it had become "fairly valued." When Qualcomm was about $60 recently, I made a case that, for me, any price at $50 or below was in the beginning of a range I called a value play. Even if the prices of those two stocks had plummeted to 50% of those values, that doesn't mean that they weren't fairly or undervalued at the time. The lower price would only mean (assuming no deteriorating fundamentals) that the stock became an even better value.
To use Qualcomm as one of the more extreme examples of how valuation can come into play, consider a post I wrote on Sept. 6, 1999, titled "PEGing Qualcomm." At that time the stock was at a split-adjusted price of about $41. (Tekboy, I wrote "about!" :) Its PEG using consensus estimates was 2.0. While that certainly wasn't an extraordinary value, finding such a strong Gorilla with such massive opportunities with a PEG of 2.0 is not easy; that alone made it a compelling valuation. That write-up also made a case for using estimates higher than the consensus estimates, rendering a PEG of 1.65. Remember that I think a PEG of 1.5 for a Gorilla is a fair value. The price range of the stock and the performance of the company in the last couple of months seems to have at least somewhat validated the PEG run more than a year ago. (For complete context, see Message 11169056 )
The PEG of 1.65 used a split-adjusted EPS estimate for 2001 of $1.25. At the time, I wrote that this was at the high end of a plausible range. Consensus estimates for that year are now $1.27. We as a community got lucky arriving at that estimate. But the point is that using a range of PEGs can give us an idea about the value of a stock, including a Gorilla.
Let's step back even farther in time to the one post I've written in this thread that might overcome Citrix's impact on my reputation :), my initial write-up of Qualcomm. In that missive I explained that Qualcomm's PSR was 3.0 and that its estimated growth was only 10% greater than its PE, implicitly implying a PEG of 1.1. Seeing a Gorilla with such a low PSR and PEG made the case for me that the stock was, indeed, undervalued. Considering that the stock was $17 at the time, my rear-view mirror tells me that valuation can indeed be a valuable Gorilla Gamer's tool. (For complete context see Message 8698546 )
Have I convinced you yet? :)
--Mike Buckley |
