re: "But if Gorillas and Kings still have significant downside risk, I'd imagine that lesser grades of tech stocks would be even more vulnerable."
The Gorilla Game tells you that Gorillas have future earnings that will grow faster than "lesser grades". Also, those earnings are more reliable (more predictable for further into the future, less influenced by macro events) than the earnings of "lesser grades", and therefore Gorillas will always command higher multiples. That's what you "imagine" the future will be.
Movements in stock prices correlate with changes in 12 month forward earnings expectations (not past earnings or LT future expected earnings). So, what has happened with those earnings expectations? Pick any Gorilla. Go see what the consensus earnings expectations were, in early 2000, for 2001. Go read your own old posts (and the posts of Gorilla Gamers who you think know the company best), to see what your own forward earnings expectations were. In each case (and it is a consistent pattern with all the Gorillas), you will find that the expected earnings were too optimistic, by a wide margin. Not only that, but the overoptimism for Gorillas was far greater than the overoptimism for the market as a whole (the general collection of "lesser grades"). That is, the track record of this bear market (14 months and counting) is that earnings for Gorillas (and growth stocks in general) are less predictable than the "lesser grades" (companies who will grow earnings by 10-20%/Y, rather than 50-100%/Y). It makes sense that, when macro conditions deteriorate, companies who are sizing themselves to double every 12 months, are going to have greater problems (with inventory, overcapacity, excess workers, etc.), compared to companies who expect only 10%/Y growth.
And, because Gorilla earnings are inherently less predictable, we see, so far in this decline:
(index or stock, 2000 top to 2001 low, % decline)
Averages of "lesser grades":
S&P 500: 1540 to 1100, 29%
Nas: 5000 to 1600, 68%
Gorillas:
NTAP: 152 to 11, 93%
EMC: 104 to 25, 76%
QCOM: 200 to 44, 78%
CSCO: 82 to 14, 83%
JDSU: 140 to 10, 93%
If you want to call some of them Kings or something else, use your own list of Gorillas. The results are the same.
So, just to clarify: if the S&P 500 declines a further 20%, a reasonable expectation (based on past performance)is that NTAP, and most of the other Gorillas and Kings, will decline by a lot more (40%-60%, from current prices). And this is because, if forward 12M earnings expectations for the S&P 500 decline by a further 20%, then earnings for Gorillas will most likely decline by a further 40-60% (or disappear entirely).
When the facts don't correlate with the theory, there are two choices:
1. ignore the facts
2. abandon the theory |
