Karl, Unfortunately got a "not found" on Bonnie's URL. However,
holding CS, WDC and APM (don't know how I missed HCIA) its hard
for me to disagree with your assumption, which led me to your
excellent thread.
I listen to a lot of "gut" feels on the SI threads. What I've
been trying to do is gain an understanding of whether the Market
is overvalued.
I tried this on another thread with no response, so now I'll try
it here. In his book [The Intelligent Investor] Graham had an
interesting formula that he indicated he used to gauge the Fair
Market Value of an investment, being
(Current Year EPS * (8.5 + (2 * Proj Growth Rate of EPS))
* (Interest Rate Environment)
I assure you that if you apply the formula to DJIA stocks, by and
large, it will make you want to puke.
For data as of 30 June I computed the median and average projected
growth rate of all the S&P 500 companies. The median was 12.1; the
average was 12.7. Premier in the next post uses EPS for the S&P of
$49.70. My current S&P Stock Guide is projecting $44.49 for 1997.
Therefore, it would seem the projected increase next year is 11.7%
((49.70 - 44.49)/44.49). A more conservative view is held by Value
Line. They are projecting a median 3 to 5 year appreciation potential
of 40%. If we assume that price appreciation reasonably mirrors
growth rates (and assume 4 years), their projected growth rate would
be 8.8%.
Let me restate the formula as:
($44.49 * (8.5 + (2 * x)) * (4.4/6.9), where x is growth rate.
Fair Value is as follows:
8.8% growth rate, 740
11.7% growth rate, 906
12.1% growth rate, 928
12.7% growth rate, 962
IMHO the growth rate probably is somewhere between the 11.7 and 12.1
numbers.
Looking forward to your comments. What, of course, I'm trying to do
is replace gut feel with reasonable logic. I am not, however, trying
to reflect market psychology or the irrational highs and lows.
Berney |
