Hi Mike-and-Will, I certainly am not an expert in valuing stocks, nor do I pretend to be. I have a textbook on the topic, "Security Analysis on Wall Street," by Jeffrey C. Hooke, a professor at the University of Maryland School of Business, which explains in detail a number of methods used by security analysts to value securities. Apparently the methods vary depending on the industry, e.g., highly speculative stocks are valued differently than others. Maybe Professor Hooke will be teaching the class soon, and maybe I should take it, the University of Maryland is only about an hour's drive from my house.
Professor Hooke states as follows: "If you buy a 50 P/E stock today and plan on selling it at a 20 P/E (which is still above average) in five years (when the issuer's business is likely maturing) the earnings per share of the company must quintuple for you to realize a market-type return." He assumes a 14% return. With respect to Cisco, your friend can tell you that its business has not "matured" in the seven years since he bought it. Cisco's business may well slow in the future, but it has not, yet. If you are not planning on selling Cisco in five years, I don't know what formula Professor Hooke would use. It appears to be a complex technique, the validity of which depends, in large part, on the validity of the information which is fed into it.
Be that as it may, it's an accounting technique, a bean-counting technique, nothing mysterious or threatening about it. You may agree or disagree with the results, but there is no reason to get emotional, IMHO. I am not saying that you personally get emotional, you are genuinely good-natured, but some do get emotional.
I am curious about the concept of the big gap down on all stocks, the big sell-off and all that. We all know that there are a lot of stocks that are not overvalued by most definitions, and a few that most of us believe are overvalued, and some middle ground that there is a lot of disagreement about. Why should there be BK? It seems mythological, or an item of religious faith, like The Rapture, or The Second Coming, or Ragnarok. Why not a simple regression to the mean? Why this belief in The Fire Next Time, Blood In The Streets, and all the other millenarial apocalyptic images? |
