Robert/All,
Excellent article in the August issue of Individual Investor(p.97) with Michael Murphy of the CA Technology Stock Newsletter. He has come up with a new way for valuing tech stocks, called "growth flow." GF is earnings per share plus R&D per share. His argument is that R&D spending is relatively stable from Q to Q, so when a company has lower earnings b/c it is spending much on research, the stock will appear cheap to investors who calculate GF long before it will look cheap to others on WS, which is totally focused on earnings.
He says that to determine if a company is fairly valued, divide the current share value by the growth flow # to get its "price-to-growth-flow" ratio. Historically, he says stocks trading at 10 to 12 times GF are fairly valued. 7 to 8 is getting cheap. And 5 times or less is very cheap.
Excerpt:
I also like Applied Materials, which has growth flow per share of about $5.50, while the stock is selling for about $33, only about six times growth flow. It's a dominant company, down because of what's going on in Asia.
Using today's price, AMAT is trading at about 5.3X GF, close to what he calls very cheap. He also mentions INTC's GF of $7 a share and says he would purchase at any price below $75.
What is not mentioned is a historical perspective of how stocks have performed using this type of valuation measure. I would have liked this. FWIW.
BK |
