ASDV- Aspect Development-THE NEXT MSFT! Message Board

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Technology Stocks : ASDV- Aspect Development-THE NEXT MSFT!

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To: Dowjoe who wrote (215)	10/30/1998 2:05:00 PM
From: Golfinginthesun	Read Replies (1) of 414

I agree but I disagree. While the current P/E is 'factually' correct in that under a pooling of interest combination you MUST acquire the losses of a company like Cadis and you also write-off the discontinued elements of Cadis along with the purchase expenses, I think that from an investors viewpoint it distorts an investment analysis. P/E is a measure of performance over TIME. The Cadis losses and the charge for the acquisition are ONE TIME non-recurring effects. If Aspect had to shut down for 30 days in a quarter due to a freak tidal wave rushing through silicon valley (yeah I know, quite an extreme example, yet I bought my house on high land…just in case) and thus reported a huge loss in that quarter but then continued exactly on pace in the following three quarters, would you still use that quarter in your analysis of what to value the company at? I would hope not because it is an event not expected to repeat or have continued effect on the company going forward. You could say the same thing about Cadis. For me, P/E is a combination feedback and a predictive tool. I want to use it to understand where the company is going and then to determine how we are doing relative to prior performance on this statistic. This is what I mean when I say it is good to know the math and it is even better to understand the underlying data. A LOT of people trade on the 'factual' numbers and don't take the time to look for predictive information underlying that data. Quite often, acquisitions lead to lower multiples for companies for the following year for two reasons, additional risk which I consider a 'real' reason for discounting a stock and then what I would call the math effect whereby people who buy and sell based on P/E alone will discount the stock due to the acquisition charges distortion of earnings. If you are a long player you can use this knowledge to find value in the market. Of course it takes a lot more time than just pulling up the yahoo chart with P/E stated. One word of warning on that method, often when I check yahoo's math they are incorrect or 'out of date' might be a polite way of putting it. Overall, I prefer to use an annualized current quarter P/E for growth stocks. When you include a quarter from 9 months ago with a company growing at greater than 50% it causes a distortion to P/E. Therefore I multiply the current quarter by 4 to annualize it and then compare that to our current price. For a company between 30 and 50% I will annualize the last two quarters. On this statistic, Aspect usually rides in a corridor of about a 100 P/E +/- 10 P/E. I would expect at some point, probably this recovery, for there to be a compression in this multiple. Do the math of where this multiple was at when the stock price was at 17 and you will see why I was SO bullish at that point. Now do the math of what the number is at 30 or you could invert the math and assume a multiple of 85 or 100 (if you want to see the max 'top') to see where this baby is going. The risk to this method is if earnings go negative on a company and that requires you to keep a close watch on your investments and their markets but then again, this is hardly the only way I look at a company. Just one of many factors.

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