this is erroneous. p/e's DO matter, or rather peg's do in the case of growth stocks (ratio of price to expected earnings growth). also, p/e's on no growth are not simply a reciprocal of the FF rate, which is an overnight borrowing rate that only financial institutions are paying. imo stock market valuation models (the Fed e.g. uses the 10-year t-note for instance in its SM valuation model) that only use government paper as their basis are inherently flawed...i believe an amended formula that includes corporate bond rates is far more accurate (such a model exists too).
there is another problem: if it is true that e.g. SUNW is priced for NO growth right now, what about negative growth? because that's what we're going to see, corporate earnings, ESPECIALLY tech earnings, will go negative. furthermore, the earnings growth that has been reported by the tech majors in '99 and '00 has for a good part been hocus pocus, first artificially inflated by the y2k induced tech spending boom, and then by the dot-com IPO boom, as well as INVESTMENT income, as virtually every tech behemoth deigned to speculate in other tech shares. then there are the issues of put selling (now predictably discontinued, since it has produced huge losses) and ESOPs. ESOPs are not properly accounted for, or rather, the dilution that they have produced for existing shareholders isn't accounted for. even the most profitable tech firms, like e.g. the monopolistic MSFT would have never had a red cent of earnings to report without the stock option schemes (the tax rebates alone are almost equal their net earnings, see Bill Parish's work on the issue).
so you see, the argument that 'p/e's don't matter for growth stocks' is inherently flawed in many respects in REALITY. the real reason why p/e's went to the moon is because we had broad money supply(m3) growing at an average 11% annually since '95, and have had a classic stock market mania as a result.
case closed. |
