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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: Teri Skogerboe who wrote (15008)	1/24/1998 12:03:00 PM
From: John Stichnoth	Respond to of 70976

Slightly off topic: S&P vs PE and growth. This whole "growth should be greater than PE" line of thinking, that the Motley Fool boys popularized, is not gospel. It's a good benchmark, but has weaknesses. 1. Uncertainty of future growth; 2. Choosing a time period for future growth; 3. Change in attractiveness of investment alternatives. You can also look at alternatives: Eg, With a basket of S&P stocks, I can have a real rate of return of 5.5% (ie, earnings growth of my basket), plus yield of 1.8%, or 7.3% total return. Then in following years do I expect earnings growth to improve or deteriorate? And what will happen to my alternatives, eg, fixed rate instruments? My answer is that a basket of stocks is no better than alternative investments today--which leads us back to stock-picking and AMAT. If we believe--as I do--that earnings of AMAT will be much better in 1999/2000, improving much more than the S&P basket, then with the current AMAT PE where it is, the investment in AMAT becomes easy. And Warren Buffett might agree with me--look what he has been paying for his acquisitions lately--McDonald's, Geico, Dairy Queen. They have been pricy based on current PE's, but are dominant in their markets/niches (well, not Geico, but it has other strengths), have strong managements, and the outlook 3 years hence is much stronger than the next 12 months. Gee, that sounds like AMAT--except Buffett doesn't buy tech. js

To: Teri Skogerboe who wrote (15008)	1/24/1998 12:11:00 PM
From: 16yearcycle	Read Replies (2) \| Respond to of 70976

Teri, Warren wouldn't pay that for an individual company, but he wouldn't allow those market numbers to prevent him from buying a specific company. They recently closed on Dairy Queen at around 15x e and 7% growth. Tons of cash they were sitting on that he can use. He is holding G and KO at prices that are farther out of line than the market itself. The market isn't overpriced at those pe levels in this interest rate environment. From the mid 50's until the early 70's, interest rates were low, with pe's in the 20 range for the market.Things got out of line when rates rose toward 10%, but pe's for the nifty fifty were at 30X+, which is approximately what happened in '87. The problem with my arguement is that we now have the first disconnect in decades between falling rates and rising stock prices.Everything is falling, which is suggestive of deflation. As a buyer of stocks, I don't want to worry to much about about these macroeconomic issues. I want to spend my time concentrating on buying individual companies with powerful franchises at bargain prices.I know that when I get a great price, the macro view must be terrible or I wouldn't get a good price.There are other reasons that the market will lower the price of a great company, but they are usually mistakes of perception on the short term business prospects. For 6 months, MRK sold at a below market multiple because the perception was that they didn't have great prducts in the pipeline. Presto! All the sudden Wall Steet realizes the mistake, and the price rises by 40% in 2 months. How did I know this would happen? No way to know when they would fix the problem, but the company is well run, and if their products are competitive, they will sell well becuase of the companies position in the marketplace. This is enough rambling. There is absolutely no way to know what price amat will sell for next week, next month, or next year. What we should know is that it is clearly undervalued today, it will become overvalued in the next sustained boom in its business, and if the business grows by 2-3x, the stock price will likely rise to 3-5X, before it drops to an undevalued level again. I agree that it is risky in the sense that the price could very well drop by 30%+. I think it is not risky in the sense that it is positioned well for an enormous run into the year 2001. Just mo Gene

To: Teri Skogerboe who wrote (15008)	1/25/1998 6:08:00 PM
From: Jacob Snyder	Read Replies (2) \| Respond to of 70976

Teri: re: fair value market PE: One yardstick I've seen is the simple equation: 20 minus the inflation rate equals fair value PE (using trailing earnings for the S&P 500). One implication of this is that the market never deserves a PE over 20. Historically, (again using trailing earnings) the S&P 500 has a PE range of 8-20. The market can sit at the upper and lower end of that range for prolonged periods. However, moves above and below that range have never been sustained. From 1974 through 1982, the market PE stayed between 8 and 11. I think it's safe to say that PEs cannot go higher from here. And if they do it will only be a brief spike upward, and a great selling opportunity. For 1998, and 1999, stock prices can only go up through an increase in earnings, not PE ratios. 3 months ago the talking heads were saying earnings in 1998 were going to increase by 12%. That number has now been chopped in half. The only way to make money in stocks in the next two years is to find those (very few) stocks that will increase their earnings by 20+%/year, and are not already at high PE ratios. I think the recently posted AMAT EPS 1999 est. of 2.20 is wrong. The great uncertainty is about 1998. Everything I've read indicated that the long-term growth rate for the industry will be re-established, or even exceeded, in the 1999-2001 time frame. Merced-12"-0.18micron-copper will ensure this. EPS of 2.00 in 1998 and 2.20 in 1999 is a 10% growth rate, far below the track record for the industry and AMAT.