It depends on how much he paid for the put, and how much time value is left in it. He could still make a profit even if Compaq doesn't drop all the way to 55. However, there is a good chance that it will. Remember, even at 55, Compaq will still have a 16.5 p/e, and Compaq's p/e has been a lot lower than that even over the past year. Compaq will go down with the general market. I believe that fear is starting to spread in the market, and this may cause a major sell-off. A lot of people think that earnings and outlook are the only thing that determines stock price, but that simply isn't true. When stellar earnings come out for a stock in a declining market, it bobs up a little, but then continues to decline along with the rest of the market. Look at Intel. It has come out with great news almost continually, but that doesn't prevent its price from fluctuating between 112 and 142 over the past month. It also hasn't prevented its stock price from sliding $10 a share hardly a day after they said at the Montgomery Technology Conference that they were booked through 1st quarter, 97.
Things that could easily cause Compaq's price to decline more quickly than the market, besides the fact that it has a very high p/e for a commodity maker:
(1) MUEI has already said that the Pentium Pro shortage has decreased profits and revenues.
(2) Strong demand is keeping component prices higher, eroding the profit windfall that the computer makers enjoyed when memory prices crashed. This is not to say that component prices will not continue to decline, but they will not CRASH--decline quickly--in this demanding market. If they decline slowly, then the box makers will lower prices to maintain market share. Dell and Gateway both said that this was the main reason for their high profit margin for the previous quarter. Component prices have always been declining, but they never crashed like they did this summer. It's not likely they are ever going to crash again, and certainly not in this market, where computer companies, particularly Compaq, since they have retail sales, are building up inventory so that they don't lose sales.
(3) The Japanese computers are already winning awards and are cheaper than Compaq. At some point, investors are going to realize that the competition is going to become more intense and computers will become more of a commodity. The Japanese computers are already being sold in the major computer stores, like CompUSA, along with Compaq, and are priced better than Compaq in those same stores.
I think that the market will continue its decline for the next week, at least. Let's see what the price is, then. |
