Let's see. Ten times this 1998 estimate of 1.87 (and ten times is a fairly normal valuation for the sector) puts the stock price by the end of the year at 18 3/4. That is not my estimate of where it will be. Just where an investor ends up using this "great" estimate, as you say. So, invest $22 today, sell for $18.75 at the end of the year, for a 15% loss. Money not only dead, but rotting.
Use the forward estimate which takes you to $27.70, and you still get a return of 23%. That's not bad. But given the large downside, or the big chance that the stock will never get there, it is not a very good calculated risk, given the potential return.
In each case, these are generous estimates, because DD stocks actually trade at about 8 times current estimates and 12 times forward estimates, and I just took the midpoint for the purpose of simplicity. The point is still the same, however.
Happy Investing!
Vanni |
