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Technology Stocks : Intel Corporation (INTC)
INTC 40.56+10.2%Nov 28 9:30 AM EST
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To: Mary Cluney who wrote (45582)1/15/1998 1:35:00 AM
From: Joe NYC  Read Replies (3) of 186894
 
Mary,

I envy your ability to reduce complex situations to such simple correlations with so much certainty and conviction.

I didn't mean to sound like an authority on the subject. It was more of a speculation.

But if you think about it, what makes a stock more attractive than say a government bond? In my opinion, it is the ability to grow earnings over time.

Suppose you have a company that will always earn the same amount (for simplicity), will never go under. Suppose all free cashflow (earnings minus capital expenditures, stock options etc.) is paid out as divident, and further, assume the tax treatment of a divident is the same as interest on government bond.

What will be the price of this stock?

In my opinion, it will be the same as a price of a government bond with the same yield as the divident yield of this stock. The P/E ration will stay costant as long as the interest rates stay constant. The stock price will also stay constant.

Now suppose the earnings can change in the future. The anticipated change in future earnings is what will move the stock and Price / trailing earnings ratio.

What's your theory? Do you think P/E is just a function of hype? Actually, hype may be a major component of P/E, because hype influences people's opinions about future earnings.

Joe
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