Any JNPR fans out there?
Mind Your P's and E's
By Cintra Scott
March 21, 2001
THERE'S ONLY ONE thing worse than watching the stock market plummet: Watching the stock market plummet and then getting told stocks are still expensive.
But that, unfortunately, is exactly what investors are hearing. And with good reason. Sure, stock prices are plummeting. The problem is that the other half of the valuation equation, corporate earnings, have been plunging, too. The Nasdaq is now down 64% from its year-earlier high, but combined trailing earnings for the companies that make up the Composite are also down. As a result, one week ago, the Nasdaq was still trading for 154 times trailing earnings, according to research from Birinyi Associates. While that's quite a bit below its year-earlier high of 400 times earnings, it's also nearly triple the 15-year average of 52.
All this set us to wondering. After all, the selling these days is getting pretty indiscriminate. We decided to look for stocks whose earnings prospects haven't crumbled, but whose stock prices have. And so, our sliding-valuation screen was born. We used Zacks screening software to pick out stocks with cheaper price-to-earnings multiples because their p's — not their e's — have fallen in recent months. (For the complete recipe, click here.)
Amid market volatility, we ran the screen Monday, Tuesday and Wednesday to test the choppy waters. Day-to-day price swings did cause some stocks to pop up or drop off — but the larger motifs remained the same. We'll explore some energy, tech and homebuilders' stocks we turned up. But you should explore the full list of survivors here.
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Technology
When you think of sliding valuations, tech stocks must immediately pop to mind. After all, this week the tech-heavy Nasdaq hit lows unseen since 1998. And as you'd expect, we didn't get much tech in our screen results since the sector's earnings estimates have dropped alongside market values. According to Zacks, the average tech earnings estimate has been slashed 20% over the last three months.
The tech stock that stood out among our results was Juniper Networks (JNPR). After all, the telecom-equipment industry has been awash in estimate reductions in the past few months. In Wednesday's Wall Street Journal, Cisco Systems' (CSCO) John Chambers is quoted as conceding: "There are multiple waves hitting at the same time." Chambers was referring to both economic and industry-specific weaknesses.
So there's no doubt, analysts have had ample opportunity to slash Juniper expectations. But they haven't. (At least, not enough to drag down the consensus estimate.)
How come? In the past couple of years, Juniper has taken a big bite of Cisco's dominant share of the router industry. (Routers are the gizmos that direct data traffic over computer networks.) According to research firm Dell'Oro Group, Juniper captured more than a third of the router market since it began shipping its first high-end product, called the M-40, back in September 1998. During that time, Cisco saw its core router market share fall from more than 89% in the fourth quarter of 1998 to 65% in the fourth quarter of 2000. So Juniper stands to grow faster than the router industry as a whole — and Dell'Oro estimates that the industry could climb a dandy 69% a year until 2004.
In 2001, Juniper is expected to earn $1.02 a share — almost 100% above its 2000 earnings of 53 cents a share. Yet, with shares trading for $52.44, alarms should still go off for valuation-minded investors. After all, that's 100 times trailing earnings and about 50 times 2001 earnings. On the other hand, Juniper experienced the most profound valuation slump of all our screen survivors. In just three months, the stock fell more than 57% while estimates rose more than 29%. Back in October, when the stock hit its trading high of $244.50, it was going for about 300 times 2001 earnings estimates. Lo, how the mighty fall.
And while the stock might still seem pricey, the company is expected to grow 53% a year for the next three to five years. That means Juniper sports a price-to-earnings-to-growth, or PEG, ratio just a hair below one. (Actually, the stock made our screen results Monday and Wednesday, but not Tuesday, because its volatile share price keeps bouncing the PEG below and above one.) Investing guru Peter Lynch told readers of his book One Up on Wall Street that "a P/E ratio of any company that's fairly priced will equal its growth rate." To rephrase, when the price dips below the growth rate, it's worth checking out.
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