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Politics : High Tolerance Plasticity -- Ignore unavailable to you. Want to Upgrade?

To: Libbyt who wrote (4231)	5/7/2001 2:11:26 PM
From: Think4Yourself	Read Replies (1) \| Respond to of 23153

I have been anticipating stage 2, and probably 3 for this entire week. Based on the weather reports I checked this weekend the Southwest is going to use a heck of a lot of NG this week. Of course some probably see that as just another good reason to short NG producers here at the lows of shoulder season :o)

To: Libbyt who wrote (4231)	5/7/2001 2:24:55 PM
From: kodiak_bull	Read Replies (2) \| Respond to of 23153

Libby, You wrote, "I can understand shorting a very high P/E company, or one without a P/E at all....but at these levels, IMO shorting would seem to hold a higher risk." Cyclicals operate on a different system than "normal" companies. A normal company starts out and, after losing money for a while, begins to book earnings, then earnings grow and investors are willing to pay more for a company with earnings growth, sending its price higher relative to its earnings. In a perfect world you discover these companies before the market does and buy them at a relatively low p/e (say, 11), hold them a long time and then sell them when the p/e gets out of whack (say, 50 or 100). Certain companies can support, via growth, high p/e's for a very long time (MSFT, DELL). In cyclicals it's different. You want to buy these companies when earnings have collapsed faster than the price. I don't exactly recall what the earnings were for PTEN in 1998 or 1999, but they were very low, perhaps even negative, which drove the P of the p/e very high. You bought it at 50 or 60 or 80 times earnings in 1999 because an earnings recovery to a more normal level, plus sunny estimates, would catapault the price skyward. And it did, and PTEN rose from 2 7/8 to 41 in 18 months or so. Now, with PTEN at a more "normal" p/e of 26, and an estimated p/e for next year of about 10, it is now getting close to the time to sell. Why? Because of its cyclicality. Its earnings projections must and will collapse, eventually, as it cycles back downward with lower estimates and finally lower results. The collapsing E of earnings will raise the p/e to sky high levels which will indicate, if the company in question is not in danger of going bankrupt, that it is time to buy once again before the E recovers. P/Es are very useful for cyclicals, but only if viewed very carefully and, generally, counterintuitively.