Michael,
Your question is not only out to lunch, but deserves a breakfast, lunch and dinner to adequately answer. Suffice it to say that the two most important factors in determining the price of a mature company's stock, is earnings and the dependability and sustainability of those earnings.
On any given day it is assumed that everything known about a company is priced into that stock. I believe, therefore, that the job of an investor is to realize an event that is going to happen before other investors, or analysts, realize that fact. Therefore, if it is a given that earnings are going to be flat, than that is what the stock price will reflect on that given day. The price of the stock will then only fluctuate based on the macro economics governing the overall stock market. If earnings are growing, it is assumed that conditions are improving for the company and they will continue to improve, i.e. the stock price will go up. Conversely, if earnings are shrinking, than investor's fear that they will continue to decline. Hence, earnings are no longer reliable and dependable, and by definition, not sustainable.
To use your analogy of Coca Cola. It is perceived that Coke's earnings are very predictable and sustainable. Year after year earnings continue to grow as global market expansion continues. This reliability is not threatened by technology changes, or economic cycles. Therefore, fund managers and analysts are inclined to assign Coke a high P/E multiple.
Technology stocks, almost by there very nature, do not enjoy that perceived reliability in earnings. A new technology may replace the old, economic conditions may be cyclical, or the company could have product line transition problems. All these factors cloud the company's earnings reliability. Thus the P/E ratio is reduced.
It is here that you and I, as investors come in. In effect by buying INTC we are saying that we believe that INTC's earnings are more reliable than is currently perceived by other individuals or institutions. We patiently wait for the rest of the investors to catch up to our conviction that Intel is the best company in the world to own over the long term. We own Intel because for us there is predictability of earnings and long term growth, while having a relatively low risk. Again conversely, it is because I believe that investors have overly estimated the reliability of IBM's earnings that I have been buying Puts in IBM.
For a further discussion on your question I refer you to the Fortune article referenced on the Intel thread.
pathfinder.com@@RlNUrQYAQ@IJdYz9/fortune/pfortune/0721inv.html
I hope this helps, but I should caution you that although I was a sell side analyst, I always marched to my own drum. Graham Dodd market valuations were not my forte.
Regards,
Jules |
