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Strategies & Market Trends : Anthony @ Equity Investigations, Dear Anthony, -- Ignore unavailable to you. Want to Upgrade?

To: Anthony@Pacific who wrote (61587)	10/27/2000 11:01:28 AM
From: Anthony@Pacific	Read Replies (4) \| Respond to of 122087

.Investors Fail Fifth-Grade Arithmetic: David Pauly (Published in the November issue of Bloomberg Markets magazine. Commentary. David Pauly is a columnist for Bloomberg news. His opinions are his own.) New York, Oct. 27 (Bloomberg) -- I don't know what they teach in fifth grade anymore, but there are oodles of investors out there who can't do their sums. That's a shame, because simple arithmetic would save these folks enormous pain. It would stop them, for instance, from buying shares in Juniper Networks Inc. The stock of this manufacturer of routers for Internet traffic has dropped 22 percent in the last eight trading days as the whole market took a buffeting. But Juniper still qualifies as red hot. At yesterday's close of $190.13, the stock traded at 656 times what the company earned in the previous 12 months. Basic math -- dividing and multiplying -- makes it obvious that it would take years for Juniper to justify that price-earnings ratio. The average P/E ratio of a U.S. stock is 26. Pad-and-pencil figuring would reveal Juniper as a prospective disaster akin to Qualcomm Inc. At the beginning of this year, shares of Qualcomm, which licenses wireless communications equipment, traded at more than 300 times earnings. Qualcomm shares have dropped 64 percent since. By understanding the significance of a minus sign, investors would avoid the crowd that insists Internet retailer Amazon.com Inc. is worth $13.1 billion even though it has no clear profit prospects. Plain Stores After putting two and two together, our friends would avoid paying 57 times profit for Kohl's Corp., which, though growing fast, is a plain old department store chain -- an intensely competitive trade. Unfortunately, the times table and long division are lost on today's investors. There's no doubt that Juniper Networks of Sunnyvale, California, has stolen market share from Cisco Systems Inc., the leading U.S. producer of Investors Fail Fifth-Grade Arithmetic: David Pauly computer network equipment. And analysts project that its profit will grow, on average, 55 percent a year for five years. But look, Juniper earned just 29 cents a share in the 12 months ended in September. At the forecast growth rate, it would be earning $2.59 a share five years from now. That would reduce its price-earnings ratio based on today's prices to 73. Caveats Even if you think that's a bargain for a promising company, think twice. To get to that point, the analysts' earnings projection would have to be right (dubious), the stock couldn't budge for five years (virtually impossible) and Juniper would have to drive Cisco out of business. Investors continue to overrate companies even after they fall -- as so many have in recent days. Qualcomm still trades at 71 times its earnings. EBay Inc., the Internet auction site, is valued at 309 times its profit though its stock had fallen by more than half since spring. In the same time, shares of Yahoo! Inc., the biggest search engine on the Web, had dropped 72 percent from $201, but its P/E is still 124. Kohl's is based in Menomonee Falls, Wisconsin, and I would like to root for the company because it looks like an underdog. But should its price-earnings ratio be almost double that of Wal-Mart Stores Inc., which has kept up its rapid sales growth even though it's now the biggest U.S. retailer? Why? Investors -- they are speculators really -- may pay huge prices for stocks on the bet that P/E ratios now in the 100s will decline as earnings go up. The last couple of weeks trading show it's more likely P/Es will go down because the stocks go down. Some may be buying stocks because of some gee-whiz technology they don't understand. Fiber optics, for instance, has been a good business. Venerable Corning Inc., the biggest manufacturer of fiber-optic cable, has reported higher profit in each of the past seven quarters. When rival Nortel Networks Corp.'s sales disappointed investors this week, fiber optics shares plummeted. Corning's P/E -- more than 100 just days ago -- is still 65. Other people have persuaded themselves that earnings don't count -- undaunted by the sight of profitless Priceline.com Inc.'s plummeting to $5.06 a share from $165 in the spring of 1999. They kiss that off as an aberration and buy another stock simply because it's rising. Go figure. --David Pauly in the New York newsroom (212 318-2319) or at {dpauly@Bloomberg.net} Story illustration: For a graph showing price-earnings ratios on Juniper Networks Inc. stock, type {JNPR US <Equity> GE}