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Strategies & Market Trends : Stock Attack -- A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Chris who wrote (25077)	7/9/2000 12:19:20 PM
From: Lee Lichterman III	Read Replies (1) \| Respond to of 42787

Chris, Yes I like the PEG but I am old fashioned ( I also use trailing earnings not forward). <ggg> FA is tough since we need to look far ahead and that is always cloudy. Yields show a recession ahead yet we are all looking at inflation concerns now. WHere will we be in the future? Inflation, recession, stagflation?? What will be the mode of receiving internet? Cable modems, Wireless, something else?? What will be the software code that new programs are running? C++, Java, XML, Chrome something some 12 year old is writing now that we don't know about yet??? Will cars be large, small, will gas be high, low or will it even be used anymore??? FA is complicated and requires an educated guess at best. That is why the mania can survive longer than most rational people think. Technology changes quickly and there is NO WAY that the high flyers today will still be flawlessly in the lead without missing earnings and be able to maintain growth rates that are valued in now. However since no one knws who will be the next hot thing, the uncertainty in a manic bull market instead of pricing in the uncertainty to the downside, prices in the Cinderella version where everything will be perfect and the leaders of today will stay that way until proven otherwise. This creates an interesting paradigm. In brick and mortar companies, the cost of gearing up a new faciltiy to move into competition with teh existing leaders is cost prohibitive. How much would it take to become equal to PG, DD, GM, F, KO etc. However to take on a tech company, you just need an idea and a web site and you are off and running. What really makes things interesting and I think AOL was brilliant here is that they know this and yet as long as investors over pay for stock, they can take that stock and use it as FIAT money to buy things they can't afford. How much would it have cost to build Time Warner and how long? Yet AOL took it's stock which was grossly over valued at the very top of the internet market and bought them out. Now they have real assets, and might actually be worth something though I haven't taken the time to figure out how much. Could this be the future? Imagine SUNW buying out GM, UN and S, CSCO buying PG, DD and F, YHOO buying out all the miners. <ggg> Markets are short term irrational but long term rational. Maybe the worthless high flyers will buy at the top and become real. Maybe not and they will disappear. Some of the leaders are real but no where worth what they trade at. It's the same old story about how fast tech changes and the leaders of today will either be gone in a few years or have margins squeezed so growth slows. Result, why pay a few hundred years earnings when there is no way it will ever catch up? The most important and most difficult thing in FA is trying to figure out what a company really is earning and that is why I think so many are perceived to be bears when in reality they are just the ones that have their eyes open and know how to read a 10Q or 10K report. When ripping one of these high flyer tech companies earnings reports apart and digging in to seperate the "other incomes", tax credits, investment incomes, forward sales, inventory build ups and constantly recurring "one time charges"... You find that actual earnings on most of them are non existant or only a small fraction of that reported. Growth from their core existing business in most of them also stopped a few years ago. Without aquisitions and investment income, they would be lower than the brick and mortar stocks your grand parents own. FA requires a figuring out of the base of that growth. Iin other words, what are PAST earnings. Why not future earnings. Because they aren't real. They are forecasted and no one knows what a company is going to report this quarter much less for next year!!! Then you have to get a REALISTIC look into future growth. What are the estimates for next year. The further out you go, the more cloudy it gets. WHat will they earn, what will inflation be, will they be a leader that deserves a premium or will they fall behind or just become a co leader? Once you have figured out a best guess for that, then you start doing the compounding gains game and figure where the earnings should be in your time period, 3 years, 5 years whatever. Now what will those earnings deserve in price of the stock. That point right there is where people forget history. We have already been in the longest running bull market in history. We have gone longer than anyone though we could go. Now what are the odds of this continuing for another 5 years, 10 years etc? Yet people are paying MEGA years earnings and projected growth and assuming tht high PE ratio valuations will continue to also grow into the future. Just in the last couple years, earnings growth has not kept pace with stock price growth. Even over sold companies like the brick and mortars which most people think are getting over sold are sporting high PE ratios and high PEGs. and low PE ratios don't mean they are values either. If growth is flat or negative, then of course the PE is going to be low. This is why I prefer PEG over PE. If earnings are shrinking, any positive PE is probably too high. The rest of this post turned into a rant so I will just quit here and say FA is a lousy timing tool and is also just as open to interpretation as TA. IF we are short a stock, we can guess that future growth will be bad and if we are long a stock, we will believe that growth is unlimited. A realistic estimate at growth is a hard thing to compute but being Realistic and looking at past economic cycles shows that the market is geberally still aiming way too high. We have already defied most economic cycles laws and though we can postpones some things, the inevitable will arrive someday. The longer this goes, the closer that day comes. Short term scalps keep you doing the hit and run to take advantage of the high flyers but for longer term plays, it is hard to get hurt jumping out a basement window so the old over sold FA style of long term buying makes more sense IMO. Good Luck, Lee