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Technology Stocks : All About Sun Microsystems
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To: John Carragher who wrote (16423)5/14/1999 1:40:00 PM
From: Alok Sinha  Read Replies (1) of 64865
 
" I always get confused as to why techs take a hit. Sunw emc etc growing 35% if the case
is we are growing wouldn't this mean these types companies will go faster? If Japan asia
is picking up then sunw will be getting more sales. Shouldn't this equate tohigher stock
prices . Why rush to bonds...when they go over 6%. "

Here is what pundits say:

The value of any financial asset (stocks, bonds, etc.) should be the present value of all cash flows associated with it over its life (in case of stocks it is perpetuity). Future cash flows are discounted using interest rate commensurate with the level of investment risk. As rates rise, companies (techs, esp.) whose high growth rates make most of their expected cash flows well into the future get discounted more, and valuation contracts. In a simple case, just consider a 5 yr T-note and a 5 yr junk bond. With the same amount of increase in the 5 year rate, the value of the junk bond (higher risk) drops much more than the Treasury. Equities have investment risk significanlty higher than any fixed income security so they take hits in a rising rate environment more.

Although theoretically sound, I don't buy these valuation models - but most on Wall Street subscribe to them and base investment decisions on them (so you to protect your investment you have to pay attention to rates). The way I see it, the long term trend line in a companies value, and fundamentals matter most. When valuation gets out of line with fundamentals, prices regress to the trend.

Regards

Alok
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