100cfm,
That's one of the best posts I've seen in a long time. Just as I'd feel more comfortable if people would seriously question why a stock is going up, I also like your proposal that we should question whether or not a stock remains overvalued despite how far it has fallen.
I do think it's misleading, though, to assume a fair value is 1X its growth rate. Using that measure, we could conclude that a fairly valued stock of a company growing 10% per year would increase as fast as the stock of a company growing 100% per year. As you're probably aware, the math contradicts that; the fairly valued stock of the faster growing company will increase much faster if the market continues to pay 1X the growth rate.
Even though I disagree with you on that point, I think the far more important you make is the following:
My concern for Q's valuation is for the next year. Five years out Q is cheap now.
Because Gorilla Gaming is about long-term investing, not to beat the dead horse but you can appreciate why my emphasis is on the farthest of those two horizons.
But for those who hold Q as a high portfolio percentage the current year is and should be important.
I'd instead say that for those that do, they aren't Gorilla Gaming and, thus, are taking on an inordinate amount of risk.
Not to nitpick :), but Qualcomm isn't priced at twice its growth rate. It's priced at three times its growth rate. Based on current estimates, it's expected to grow about 25% annually over the next two years and the stock is trading at a PE of about 80.
When I wrote awhile back that the stock was becoming a traditional value play at $50, the analysts' estimates for FY02 were not yet published. Though they have increased estimates for that year about 10% in the last 90 days, I think the stock would have to fall at least 50% from the current level to begin thinking of it as a traditional value play.
Since you're concerned about opportunity for a short-term, upside surprise in the price of the stock, I believe the best opportunity is in the market's potential reaction to the spin-off of Spinco.
--Mike Buckley |
