>>jbe wrote:
Extraordinary that you should ask! I just read your analysis, which is why I popped in here. To think that the very
person I should like to ask some questions of is here!
Wow, small world. Thanks very much for your excellent feedback, sorry for my late response.
First of all, let me backtrack. On the very shaky assumption that the market will someday actually become rational,
I ran a Telescan search today looking for companies with high ROE, high EPS rank, plenty of free cash flow, low
debt, and relatively low p/e ratios.
The search turned up two software companies: Compuware & Symantic. I then went over to Morningstar, and
looked up the analyses of both companies.
On the whole, I really like the Morningstar analyses. They do an excellent job of explaining a company's strategy,
what its strong & weak points are, and its position/prospects in its industry. BUT -- I don't get the grading system.
First of all, I think that some analysts, like teachers, may be easy graders, while others are tougher graders. Some
analysts seem to grade a company in relation to its particular industry; others seem to grade it in relation to the
S&P. Or perhaps the problem is that the analyses and/or grades are not dated(they should be!).
good point, we are working on that problem - about stamping dates on all analyses. It may be fixed by the time you read this. But there is one confusing point I need to make clear. The grading system is created algorithmically (there are many factors involved, weighted in the various formulae), so each analyst has no say in the actual grade but only the commentary associated with it. I don't follow Compuware, so I will look into that grading discrepancy in relation to SYMC.
Just how do you explain, for example, why brokerage firm SWS, with a p/e of 12.5 (as against an industry average
of 21.5) gets a failing grade (F) for valuation (!)?
CPWR, on the other hand, quite properly gets an "A" for valuation, with a p/e more than twice as high -- 28 --
versus an industry average of 78.9. (Since the CPWR analysis was written, CPWR's p/e has fallen to 24.6.) Yet
you give SYMC only a C+ for valuation, even though when you graded it it had a p/e of 28 -- exactly the same p/e
that Compuware had when it was graded, and its price/sales and price/book ratios were both lower than
Compuware's!
Sorry, I don't get it.
Much as I like Morningstar in general, I don't get its other rating systems. either. That is to say, they conflict with
each other, as if Morningstar had a really bad case of multiple personality.
Let's take the "business appraisal ratio," for example. Anyone who takes it seriously really ought to sell out right
now, and wait for Armageddon in the stock market. Everything is overvalued!
Let's take SYMC. In the financial write-up, Morningstar gives SYMC a peg ratio of 1.0, meaning it is fairly valued.
But its appraisal ratio is 0.5 -- which means it is overvalued by about 50!! Then what about all the other software
stocks out there? Look out below!!!!!!
Then, of course, you also have analysts who don't appear to give a hoot or a holler about such old-fashioned
fetishes as peg ratios, let alone business appraisals. What is Morningstar's top purchase recommendation for 2000?
EMC Corp -- with a p/e of 96, a peg of 3.0, and a business appraisal of 0.2 (80% overvalued)! I know, I know,
for top companies one should be prepared to pay a discount, but that is some discount!!!!
Morningstar has a lot of good data -- including your analysis. But what the heck is its philosophy? Darned if I can
figure it out.
Morningstar's philosophy? It's "to revolutionize investing." But I dunno much beyond that, I just started here and haven't been indocrinated yet. :) But seriously, I understand your concern about our admittedly conservative appraisal ratios, which makes most software stocks look bad. But that's where analysts like me :) for SYMC and my colleague (whom you referred to) for EMC come in with deeper analysis to put things into perspective. Thanks again for your suggestions!
george.nichols@morningstar.com |
