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Technology Stocks : Lucent Technologies (LU)

LU 2.730

-0.5%

Nov 13 3:59 PM EST

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To: Mr.Fun who wrote (7738)	5/5/1999 3:35:00 PM
From: Chuzzlewit	Read Replies (2) of 21876

Hi Mr. Fun, One of the approaches I use in valuing stocks is the CNPEG and CNPEG2. The rationale is quite simple: absolute valuation techniques are problematical because of the multitude of issues involved, including such intangibles as market sentiment. In addition, the usual quick and dirty techniques fail to take into account such important parameters as interest rates. In order to cut through this morass I created a metric the CNPEG. Basically, the CNPEG is designed to provide a relative valuation for a stock, by calculating the YPEG for a particular stock (the year-ahead P/E divided by the consensus growth rate) and dividing it through by the YPEG for the S&P 500. The interpretation of CNPEG is simple: a stock with a CNPEG of less than 1.00 is presumed to be undervalued with respect to the cost of growth compared to the general market. Unfortunately, CNPEG fails because it does not take risk into account. In other words, I believe that there must be a discount to the price of a stock based on its riskiness. Another way of putting it is that if stock B is assumed to grow at twice the rate as stock A it should have something less than twice the price because of its inherent riskiness. There has been a significant body of work showing that beta is an inadequate measure of risk, yet it is the only metric that makes any sense. Therefore, I have normalized the model further by multiplying through by the beta for the stock. The interpretation would be that a stock with a CNPEG2 of less than 1.00 is undervalued with respect to the general market. As a corollary, dividing the current price of a stock by its CNPEG2 ought to provide us with the fair price of the stock relative to the market. I will shortly post specific numbers for stocks of interest to me in my universe. TTFN, CTC

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