Mike,
I agree completely with your post on Dell and the market in general. We have a current situation of high corporate profits being valued at high multiples, not a situation that gives one a lot of confidence. I am not quite as sanguine as you in predicting further large declines, but do not rule out the possibility. I think a more likely outcome is the market will experience a decade of lower than average returns to balance the higher than average period we have just come out of.
There is one area that does still look grossly overvalued however, and could still see large percentage declines, even from the present levels. What area is this? Internet stocks? No, I am referring to "Buffett- style" stocks. Now before I am branded a heretic and banned from this board let me explain. I am not suggesting that Buffet is not the genius he is reputed to be. I would wager that WB already is fully aware of everything I am about to say. I am talking about these large consumer franchises stocks of which KO, G, and PG are prime examples. All three of these companies have been through a golden decade, one that will be impossible to duplicate in the next 10 years.
During this golden decade net income as a percent of revenues has virtually doubled for all three of these companies. Revenue growth on the other hand has been non-spectacular. Now simple mathematics tells you that it was the growth of the margin that resulted in the marvelous earnings growth and it was this earnings growth that fueled the P/E expansion that drove the stock price.
If you take away this margin expansion, what do you have? Slow growth companies valued at growth stock prices. Yes, the companies might be great and their franchises unassailable, but what type of return can you expect when paying $1 for $1 worth of value? Answer: Non-Buffet returns.
-Robert
|
