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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: bozwood who wrote (23876)	4/29/2000 4:52:00 PM
From: John Stichnoth	Respond to of 54805

I've thought for awhile that the CAP chart in TFM introduces an element of uncertainty that is not needed. It assumes you can estimate the total net income (or net cash flow) of a company. That's impossible to do, I think, in almost all cases. But, you can take a stab at how long the company will grow in excess of the market, and how much money they can make over that period. Page 116 of TRFM--Assume all well-run firms have some continuing "average" returns. Then, you end up drawing a horizontal line slightly above the horizontal line Kipolla draws. The light grey area above the new line is the "extra" money the gorilla makes during its gorilla period. As I noted to Pirah, maybe you can simplify that curved area into a rectangle. Oh, btw, I think you're right that the term is "terminal growth rate". But, I am getting at something a little different. You don't have to go out to the period when the company will just grow at the GDP rate. We only invest in well-run companies. That is a first condition of owning a stock. The average well-run companies should have some return above GDP growth. They also have an average P/E or P/FCF. Besides, our always-rational (Grin) management will always start buying back shares before that. The point is: You can estimate the growth in earnings until the company becomes "average". By getting to that EPS or FCF/S number X-years hence you can then impose a market multiple on the stock to determine what the stock price should be in X-years. From that future price, you can work back to your average return over the holding period and decide if the stock is attractive. Another way to look at it: Figure out how long you have to discount superior performance to make a positive return. Then, ask yourself whether you feel comfotable with that assumption. With Cisco, I have no trouble assuming 7 years superior growth. I do have trouble assuming 15 years (for any company, not just Cisco). What stock price will be fetched by Cisco's earnings 7 years hence? Is my return acceptable? If it is, I'll buy. I'm rambling. :o( Best, John