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Strategies & Market Trends : Value Investing
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To: Jurgis Bekepuris who wrote (3300)2/24/1998 10:13:00 AM
From: Stewart Whitman  Read Replies (1) of 78492
 
Jurgis,

One thing that I learned from reading Graham was not to use a single year's results to evaluate companies to see if I'm getting a bargain. When you look at PSR and say it's less than 1.5, take a look at the average sales for the last 3 years (substantially less) and see what it is. Try the same for earnings when looking at a P/E.

Now, I know you'll say that averaging sales or earnings for a fast growing company is wrong and using those numbers gives an inaccurate picture. But look back to years like 1994 when sales and earnings dropped. If you can convince me that the revenues for 1997/1996 are not just the result of "very good years" - that there was real quality growth - than using averages is probably inaccurate and the stock might justify higher numbers.

I also don't understand why you think that PSR of 1.5 is so exceptionally low. NKE seems to have always sold for PSR less than 1.5 (except in 1996 when PSR went up to over 2). If you argue that NKE should have a higher PSR, say 2, then with NKE's margins the P/E is ~24, at 2.5 the P/E would be ~30. In this market, maybe those P/E are justified. Maybe it does deserve a premium, but as Mike pointed out in his article the historical P/E is about 15, growth rate arguably about 19% - so how much of a premium do you want?

For what it's worth, I don't think NKE at $40 is paying full price - not a bargain but not overvalued. I just surprises me when people think that they are getting a steal.

Stew
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