Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: CRL who wrote (71588)	3/9/2001 7:58:32 PM
From: Casaubon	Respond to of 99985

hmmm, the GDP growth trend does seem to be in question though, no? Not to mention how a lot of firms were booking earnings.

To: CRL who wrote (71588)	3/9/2001 11:26:16 PM
From: brunn	Read Replies (1) \| Respond to of 99985

P/E's have converged as well. Failing to find P/E's on indexes I calculated P/E's on 6 leading tech and 8 leading old economy stocks in 1996, 1998, and 2000: 96 98 00 GE 23 34 44 xom 16 28 18 X 10 6 22 PG 23 36 23 KO 38 47 35 GM 9 17 9 IP 39 58 19 AA 21 15 20 avg. 22 30 22 INTC 22 34 18 Csco 36 76 30 Msft 35 63 32 Dell 10 39 27 Sunw 23 22 27 NT 26 24 avg. 25 47 26 The average return on the 6 tech leaders far surpasses the 8 old economy stocks, however. Over these last 4 years, the average return in those tech stocks was 222% and only 38% for the old economy stocks. Since the P/E's are essentially the same from 1996 to 2000, this means that all of the gains over these past 4 years were achieved in earnings growth. You can see that the P/E's of both groups of stocks rose from 1996 to 1998, but the valuation expansion was more dramatic for the higher growth companies--actually a rational adjustment given their superior earnings growth and therefore stock performance. With the technology slowdown, P/E's are back to where they were in 1996, before the bubble. These technology leaders are once again valued at only a marginal premium to slower growth old economy stocks (one caveat to this is the fact that earnings projections for the tech stocks are falling for 2001, but remaining relatively stable for the old economy stocks.) Of course, may be GE, Coke, and Proctor will now be on the fast track and technology has overbuilt itself into a multi-year period of no or little growth. In my opinion, as the momentum has swung toward defense and valuation, the momentum investor has turned to DOW/old economy companies and just as they previously stretched valuations of technology stocks, they are now capable of stretching valuations of defensive stocks. For the short-term following this trend may be the most profitable option. Over the long term, I feel that technology will recover in the next year or two to a growth rate that is greater than the overall market, and if you are patient, you will find that stock prices follow earnings growth and as risk becomes rewarded P/E's will inflate as well once again. The higher the growth rate the bumpier the ride but over the long term the greater the rise.