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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (40748)	2/19/2000 12:18:00 PM
From: KyrosL	Read Replies (3) \| Respond to of 99985

This new spin about interest rates not affecting tech stock valuations is patently insane. High interest rates and a consequent slowdown of economic growth should affect high growth stock valuation much more than "old economy" stocks, for two reasons: 1. Although a slowing economy may not result in a severe drop of sales or earnings (for those that have earnings) of high growth stocks, it will certainly result in slower growth of their sales and/or earnings, since most of their sales are to "old economy" companies. This slowdown of growth should severely affect their stock market valuation, since the stock market gives exorbitant valuations to relatively small marginal increases in sales and/or earnings growth. For example, say company A that grows at 20% is awarded a p/e of 30, and company B that grows at 30% is awarded a p/e of 60. A slowdown that cuts B's growth rate from 30% to 20%, should result in its valuation being cut by half. 2. Rising interest rates reduce drastically (because of compounding) the present value of the future stream of earning of a company, which, in a rational market, should be equal to its present valuation. Since in a high growth stock most earnings (and for some all earnings) are far into the future, the reduction of a high growth stock valuation should be much larger than the reduction of a low growth stock.