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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 71.76

-0.5%

2:02 PM EST

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To: jach who wrote (24698)	4/28/1999 12:31:00 PM
From: Chuzzlewit	Read Replies (4) of 77397

jach, I am fascinated at your continual and seemingly uninformed comments about valuation. I have grappled with the issue of valuation for some years, and have pretty much given it up as a waste of time for several reasons. The first has to do with managed expectations- companies are spending a lot of time managing the expectations of analysts and investors -- they purposely set the bar too low. Investors respond by generating "whisper numbers". Investors tend more often than not to be correct. Second, there is a relationship between perceived growth of earnings and cash flow. Unfortunately the relationship does not appear to be mathematically linear. For some odd reason you don't think that's important. Next, there is a qualitative relationship between consistency ("visibility" or "predictability" of earnings) and valuation. Finally, there is the issue of long-term interest rates. If you use FCF discounted by LT rates it should be obvious to even the most obtuse that a relationship exists. Unfortunately, the appropriate interest rates don't seem to work well, but the relationship does hold. And then there is the argument that there is a supply and demand calculus at work, where the amount of money coming into mutual fund coffers is more important than traditional financial valuations. Anybody in the valuation game understands that the interplay between these factors is incredibly complex, so for you to continually trumpet "Cisco is overpriced" without at least stating your valuation model is quite ludicrous. So instead of valuation, which must include all of those factors, I look at relative valuation which I call CNPEG. CNPEG is the ratio of the YPEG of the stock in question to the YPEG of the S&P500 index. You might try this normalized approach. Who knows, you might even discover some new ways of looking at value models. CTC

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