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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 71.75-0.5%Nov 11 3:59 PM EST
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To: Chuzzlewit who wrote (24708)4/28/1999 2:38:00 PM
From: Mr.Fun  Read Replies (2) of 77397
 
Some thoughts on valuation based on a statistically significant multivariable regression analysis of 400 technology growth stocks 1984-1999:

1. Prior to 1998, the best predictors of technology growth stock performance were straightforward: earnings momentum (1st derivative of EPS growth), estimate revisions, and earnings surprises.

2. P/E was and still is a perverse indicator - high P/E stocks stay high P/E stocks and low P/E stocks die.

3. In 1998, the equasion that had worked for 14 years fell apart - earnings momentum, estimate revisions and earnings surprises were statistically insignificant predictors of price performance. In their place was price momentum (1st derivative of % share price appreciation) and earnings stability (inverse of volatility).

4. On Cisco specifically: Earnings momentum was poor in 1998 but it didn't seem to matter. YoY EPS growth slowed from 47% in 1997 to 28% in 1998 and 27% thus far in 1999. This was due both to a flattening of top-line growth rates (with a recent reacceleration) and to a 300bp increase in expenses. Nonetheless, the P part of the P/E equasion continued to grow at a similar pace as in 1997. Since the E slowed down and the P didn't, the effect on P/E is obvious.

5. The question on the table is: will the market rules of 1998 continue, meaning Cisco's price can continue to rise faster than its earnings? or will the market return to the rules of 1984-1997, meaning Cisco's P may slow down to let the E catch up? The recent headfake of a rotation into cyclicals should be enough for most to consider the likelihood of the first scenario, although the second is also more than plausible.
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