re: buying at 17 wouldn't be a terrible mistake
I suppose, in an attempt to be charitable and not get flamed, I could say that buying at 17 wouldn't be as bad a mistake as a lot of other mistakes I've seen in the last 2 years.
People never learn. Never. Even after seeing this innumerable times, I am amazed at my fellow investor's unwillingness to learn from experience. How many times do you need to buy and hold a stock at an unsustainable valuation, before you stop saying "Gorillas are always undervalued, I'll hold till a substitution threat and ignore any other warning signs, it doesn't matter what price I bought at, because it's going to the moon"? How many times do you need to watch a stock go from 152 to 6?
I'll say again, what I've been saying since 1995, (before I bought my first stock) : Valuation matters. Always. All sectors, all stocks, in bear markets and bull markets. Gorillas and UnGorillas. Especially Gorillas, when a Bubble is partially deflated.
Example:
The NTAP 04C15s I recently bought, with the stock between 6.09 and 9.7, cost (average) $2.84.
At today's close, with the stock at 17.02, the lowest ask is $9.40 for those options.
Let's make some fairly realistic assumptions, and guess where the stock will be, in January 2004 (when these LEAPs expire, and I convert them to stock for a LT hold, or sell them):
Today, the consensus EPS for the FY ending 4/03 is $0.20 (down from $0.37 90 days ago). Let's assume in calendar year 2003, they actually make $0.40.
Let's assume the recession is over by January 2004 (we need this assumption, to believe NTAP will earn $0.40 in CY03). Let's not assume a re-inflation of the Bubble, but just a return to normal (= pre-1999, perhaps pre-1995) valuation levels. The LT expected EPS growth rate is 30%/Y. What PE will NTAP have? Let's be generous, very generous, and say the stock gets a PE (using trailing earnings) of 50.
Then, the stock price at expiration is: $0.40 X 50 = 20. Notice, I am making assumptions much more bullish than the current consensus.
My return: 20 (stock price at expiration) - 15 (strike price) = $5 = value of option at expiration. Then: $5 - $2.84 = $2.16 = my profit.
Your return: $5 - 9.40 = -$4.40 = your non-profit.
Now, you can play around with these numbers some, make other assumptions, use stock rather than options, but it doesn't really change the conclusion. It's a robust conclusion; it holds true under various conditions and assumptions. The conclusion is: valuation matters. |
