CMVT mentioned in article: Market Gets a Well-Deserved Spanking
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Market Gets a Well-Deserved Spanking
By Shlomo Greenberg
There once was a children's doctor, Dr. Benjamin Spock and an entire generation of children in a good part of the West were raised on his philosophy. People of our generation. In a nutshell, what Dr. Spock taught the parents of the 1960s was that conventional child-rearing methods had to change completely. No more spankings. Instead, discussions with the children.
We thought of Dr. Spock recently, because the children controlling billions of dollars on Wall Street have gotten on our nerves with their theories of a new economy, revolutions and the decline of the old economy. The only problem is that of late, the young people have gotten a little out of hand. Therefore, the swat on the bottom they received over the past few days is exactly what they needed to remind them who's really in charge.
A friend of our son, who works at one of the Israeli Nifties whose shares are traded on Wall Street, recently explained to us why he didn't exercise his options in the company (he's worth over $250,000). He claimed that as the company was going full force into B2B, the share would worth a hundred times more in three of four years. That was the reason.
The other night he called to ask: "What's going on?" and we explained that if the share's value was indeed going to increase one hundred-fold in three year's time, he had nothing to worry about. The truth is, we believe the share is going to be worth a lot more in three years (maybe not a hundred times over), but with all due respect to the new economy, the old economy still works, and works well.
The US economy is still advancing and that's a fact. Different investors try to predict which shares of which companies are going to be hot in the coming years. From time to time, in the excitement of discovery, they get carried away. So along come Greenspan and, using Dr. Spock's method, talks, warns and - if that doesn't work, issues threats. Greenspan is like a mother talking to Wall Street, his child. Along comes US President Bill Clinton, gives Wall Street a good paddling and, as it turns out, it works.
The Israeli Nifties continued to lose ground rapidly. There isn't that much more to say except for one thing regarding the new and old economies, and it relates equally to the US and Israeli Nifities. Analysts say that Check Point (CHKP) will earn $1.56 per share. That means a projected p/e ratio of 133. Comverse (CMVT) is expected to earn $2.59 and the projected p/e ratio is 68, at the moment. Amdocs earnings per share for 2000 is estimated at $0.79, giving it a projected p/e ratio of 100. Mercury is expected to earn $0.58 per share with a projected p/e ratio of 158. Gilat Satellites, at $122.5 per share, has a projected per share earnings of $2.49 and a forecast p/e ratio of $50.
In the old economy, a p/e ratio reflected, basically, the number of years over which investors might expect to see a return on their investment. Of course, even in the old economy no one looked for p/e ratios of 2 or even 10. Growth companies were always give high p/e ratios, and justifiably so, because of their growth. Dream companies have always been given even higher p/e ratios, justifiably so, because of the combination of growth and a dream. So the fact that Nifities trade at higher p/e ratios than regular shares isn't new at all.
But there was one slight difference in the old economy. P/e ratios were measured in historical terms, on the basis of what was known. In the 1990s, p/e ratios began being measured on the basis of the future. That significant difference is one we've already termed "the Orbotech effect" and the direction this approach has taken means that many Nifities have no history at all. The question: How far are investors willing to go?
Take a share like Mercury, which was at one point 30% above its current price. Mercury is a company with good profitability, rapid growth and the share is highly recommended. Today Mercury trades at a historical p/e ratio of 262 and a future p/e ratio of 158. It could very well be that the share will rise sharply, all of a sudden, or it might continue to fall - it's very hard to figure out what these youngsters are thinking. And they have a lot of money. But our personal opinion is, given that two weeks ago the historical p/e ratio was over 300 and future p/e ratio was 235, a kick in the pants was needed, absolutely.
That's what's happened over the past three days. Now the ball is in your court (if you've got the money, of course).
Published by Israel's Business Arena on March 16, 2000. |
