Don't tell me that your going to Europe again :).
No, I can't buy AOL, Yahoo, etc. because I can't sleep with those type of valuations - I have no problem owning FSII and others, even margined to the hilt, because they have intrinsic value I know is there - just a matter of time before it is recognized.
The concept is that I'm buying a business, not a stock, and I've seen quite a few mergers and acquisitions in the real world up close in due diligence (which sometimes makes less sense than the values and deals on the street).
You're right though that you can make a bundle with the stocks you mentioned. But here's why I can't jump in that pool, with all the temptations (note last paragraphs especially):
" Dreman's studies show that the impact of positive earnings surprises on out-of-favor stocks (stocks with low price/earnings, price/sales, or price/book values) influence their price much moreso than those of higher valued stocks. For 500 large companies between 1973 and 1995 low P/E stocks rose an average of 5.7% in the year following a positive surprise, while high P/E stocks rose only 0.5% on such news.
Further, Dreman found negative news has little influence on out-of-favor companies. Such news generally has a significant impact on higher valued companies. Dreman's research shows that low price/earnings stocks fell only 0.5% in the 12 months following a negative surprise, whereas the popular high price/earnings stocks fell 7.4%."
"This reaction to surprises is rooted in psychology according to Dreman, with investors tending to overreact to good or bad news. This overreaction is especially evident in the technology sector and in small capitalization stocks.
Dreman currently considers technology stocks like America Online and Yahoo to be overpriced based on overly optimistic forecasts (that are also likely to be wrong) - "forecasts often have to go out a decade or more to justify the high prices many companies are trading at."
Dreman believes AOL's current valuation will require a 50% earnings growth for the next 18 years. To deliver those kinds of profits, Dreman estimated that AOLÿ will need to increase its customer base during the next 18 years from about 12 million subscribers today to about 18 billion, or more than three times the current global population.
As for Yahoo, Dreman crunched the company's numbers on the assumption that its earnings would grow at an incredibly furious rate during the next 25 years. Even in that rosy scenario, Dreman assigned a $4 valueÿ to Yahoo's stock. The Internet directory's stock was trading at $115 yesterday."
Joe
PS - send me an e-mail from Paris while I lick my wounds here in dusty Texas. |
