Great point Jim, and it underscores exactly what I've been saying. CPQ is going down because it's expected earnings are decreasing. If I understand their warning properly, the said this would be a break-even quarter. Therefore, book value (which is really just another word for owner's equity) will remain the same. Now, to take it a step further, DELL is down in after hours trading. Why? Because investors feel there will be a great likelihood that Compaq will reduce prices to clear up its inventory problem. If that happens, expectations for DELL's earnings will decrease, and as a result, so will the price of the stock. None of this has anything to do with book value.
Also, this is not peculiar to tech stocks. It happens to GM and T. The principles are exactly the same. Investors are looking at a future stream of cash flows, not book value, which simply reflects history.
Let me prove this to you by going back to my money making machine. Suppose I told you that there is an 100% chance that machine A would generate $1,000 every year, but my new and improved version (machine B) had a 50% chance of producing $1,000 per year, but it also had a 50% chance of producing $2,000 per year every year. Can you see that investors would be willing to pay 25% more for machine B than machine A?
I hope this helps.
Regards,
Paul |
