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Technology Stocks : Dell Technologies Inc.
DELL 127.92+0.4%Dec 30 3:59 PM EST
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To: Moominoid who wrote (80554)11/16/1998 12:24:00 AM
From: BGR  Read Replies (2) of 176387
 
David,

I believe historical averages for risk premium for S&P500 is about 8.4%. To justify a PE of 28 with 8% perpetual return and 5% interest rates one has to use a risk premium of 6.5%. That would be just another way of reflecting the present stock market euphoria.

Thing is, the risk premium can and will probably go lower in response to rate cuts - from a general feeling that the Fed's on the job and is the ultimate asset insurer so it is safe to go back to the index fund waters. That one-two punch can easily inflate the S&P500 PE to 30+ and maybe even 40 in no time with two 25 basis point cuts (which by itself is hardly unlikely if credit spreads continue to misbehave - which is ironic as that indicates higher risk premiums than usual in the debt market).

Now that's a 25%-50% PE expansion. Assuming 72 as the fair value for DELL (average of the values according to CAPM with PE's 1.5 and 1.8, which is the range) and tagging on a earnings growth of 50% and a PE expansion of 25-50%, one arrives at a stock price appreciation of approximately 90-100% to 130-140% from the present price even with DELL's beta.

Which is not that far away from a 200% growth. Irrational, maybe. Unlikely, well perhaps not.

Please note that this is not a prediction of any sort as to where DELL's share price is going to be a year from now.

-Apratim.
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