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

To: hoyasaxa who wrote (61441)	9/26/2002 12:11:41 PM
From: Stock Farmer	Read Replies (2) \| Respond to of 77400

No opinion on ST. You wrote: LT, tech spending rises so can CSCO. The logic implies that Cisco's current price does not include an expectation that business will recover, thus when the business does recover this unexpected event will result in a higher stock price. The problem is that Cisco's stock price includes a whole heck of a lot of recovery in its business. In other words, there's not a lot of room for risk in there. We should be taking a company, then computing an expected present value based on reasonable growth forecasts. Then we should buy at a price that is a discount from this forecast, which discount represents a "risk premium" attached to all kinds of things that we didn't predict could happen. Thus we break even if reasonable risks materialize, and profit nicely if they do not. Several of us went through that process rather exhaustively for Cisco and came up with a fair value at about $8 per share using some (IMHO optimistic) projections about the growth of the business. And that was quite some time ago. Since then things have deteriorated. To get a price of $11.50 we need to embrace a bit of negative risk from a position that time has already shown to have been optimistic. When we start pricing issues where breaking even is dependent upon a lot of negative risk... well generally we are expecting negative profits. Although we might not know that. Nevertheless, being the smart folks that we are, sometimes we get what we expect. Even if we don't know what that is. John