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Strategies & Market Trends : Fidelity Select Sector funds -- Ignore unavailable to you. Want to Upgrade?

To: Julius Wong who wrote (2297)	2/18/2000 12:03:00 PM
From: rkf	Read Replies (1) \| Respond to of 4916

Julius, here's why I asked the PE question. I recently read an intriguing interview with a fairly successful value fund mgr. He stated he would not buy CSCO at current price levels for any reason now because of its 180+ PE ratio. He placed his rational into a "what if" scenario -as follows: ( I don't have his scenario in front of me presently, so these numbers may be off slightly, but the logic is true) If CSCO continued its current growth rate of 35% for 15 years, at the end of that 15 year holding period the company would have gross revenues approaching (some completely unrealistic percentage) of the entire US GNP. Assuming that growth rate, however, with 15% to the bottom line - the internal rate of return (IRR) would only be 15%. If growth slows to 25%, the IRR would fall to 10%. If growth slows to 15%, the IRR would be less than 5%. His bottom line - he would not buy CSCO or any other company with a 180 PE ratio because growth will essentially never justify the price you're paying. Sorry for the lengthy and rather vague scenario, but the logic to me was clear - there will be a major correction at some point to growth companies because PE ratios will always be a factor for buying. Kent