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Politics : Formerly About Applied Materials
AMAT 230.92+3.1%3:59 PM EST
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To: Teri Skogerboe who wrote (15008)1/25/1998 6:08:00 PM
From: Jacob Snyder  Read Replies (2) of 70976
 
Teri: re: fair value market PE:

One yardstick I've seen is the simple equation:
20 minus the inflation rate equals fair value PE (using trailing earnings for the S&P 500). One implication of this is that the market never deserves a PE over 20. Historically, (again using trailing earnings) the S&P 500 has a PE range of 8-20. The market can sit at the upper and lower end of that range for prolonged periods. However, moves above and below that range have never been sustained. From 1974 through 1982, the market PE stayed between 8 and 11.

I think it's safe to say that PEs cannot go higher from here. And if they do it will only be a brief spike upward, and a great selling opportunity. For 1998, and 1999, stock prices can only go up through an increase in earnings, not PE ratios. 3 months ago the talking heads were saying earnings in 1998 were going to increase by 12%. That number has now been chopped in half.

The only way to make money in stocks in the next two years is to find those (very few) stocks that will increase their earnings by 20+%/year, and are not already at high PE ratios. I think the recently posted AMAT EPS 1999 est. of 2.20 is wrong. The great uncertainty is about 1998. Everything I've read indicated that the long-term growth rate for the industry will be re-established, or even exceeded, in the 1999-2001 time frame. Merced-12"-0.18micron-copper will ensure this. EPS of 2.00 in 1998 and 2.20 in 1999 is a 10% growth rate, far below the track record for the industry and AMAT.
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