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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Jacob Snyder who wrote (49363)	2/25/2001 9:51:22 AM
From: John Malloy	Respond to of 77398

Jacob, <I don’t think book value is a very useful metric> I share your concern about the validity of book value as an accurate measure what a firm’s assets are worth. But I am not using book value for that purpose. I am using book value simply as an index. that is useful in forecasting stock prices. Book value does not have to be accurate for that purpose. It only has to be calculated in a consistent way from one year to the next. Accuracy is not a problem. Suppose book value were in error by 20%. Then the price/book ratio would have to have a compensating 20% error because the two multiplied together must equal the stock’s price. Book value also has to be predictable, and it is. I prefer book value times price/book to earnings times P/E as a way of forecasting stock price. I would have to add a forecast of the return on equity to the book value forecast to forecast earnings. The added forecast adds to forecasting errors. I also prefer to work with price/book ratios than P/E ratios. P/E does odd things when earnings drop. For example, it approaches infinity as earnings approach zero. The price/book ratio is more stable under those circumstances. John Malloy