Bald Man and All. After I read your post I found this:
This Berenson guy brings some balance to street.com. read the piece carefully see what he says about Money managers. I had not read this piece when I made my previous comment on putting 2 + 2 together(I know I am breaking copyright I hope they take it as a promotional device. I promise it is the last one I post in March.
Market Features: What Could Derail This Bull? A Microsoft Miss
By Alex Berenson
Staff Reporter
3/5/98 6:43 PM ET
Only Microsoft (MSFT:Nasdaq).
Not Intel (INTC:Nasdaq), not Disney (DIS:NYSE), not Coke (KO:NYSE). They already tried. Not General Electric (GE:NYSE), not IBM (IBM:NYSE), not General Motors (GM:NYSE), the old-time titans.
Only Microsoft can stop this market. Only a preannouncement from Microsoft will give some succor to the bears and the cautious, who have been watching slackjawed as stocks crash through valuation boundaries.
That notion became clear Thursday, as the market more or less shrugged off Intel's nasty Wednesday evening preannouncement. The chip maker's stock tumbled Thursday, falling more than 10% after it warned investors that revenues and profits for the quarter would miss analysts' estimates. But, by the close of trading Thursday, the Dow Jones Industrial Average was off fewer than 100 points, about 1.1%.
Even more amazingly, the Nasdaq Composite Index, the home of Intel and lots of other big-time technology stocks, was down about 48 points, less than 3%. That loss is about what the Nasdaq gained last week.
Coincidentally, Intel's preannouncement came on the same day that The Wall Street Journal reported that Walt Disney would also miss its second-quarter numbers. The Mouse, the world's most important media conglomerate and another top-20 company by market cap, blamed a couple of movie flops for its problems. And investors seemed to buy the explanation; Disney stock is down less than 4% in the last two days, not even a burp for a company that's gained almost 40% since the market's mini-crash in October.
Does anyone out there care about valuation? At these levels, Disney's trading at 37 times trailing earnings. This, with a three-year trailing growth rate at all of 10.6%. Analysts are now figuring on growth of about 13% to 14% for this year.
It's true Disney has a tremendous brand name, but as a Business Week cover story pointed out last month, the company's core business is only getting more competitive. From Carnival Cruise Lines (CCL:NYSE) to Mirage Resorts (MIR:NYSE), Disney's competitors are spending more and more money to come up with more and more elaborate entertainment options.
The flood of new capital has driven down margins, like your Econ 101 professor told you it would. Disney's operating margins are less than 20% now, down from more than 25% 10 years ago. But at least Disney makes money. Most of the other big media and entertainment companies don't.
Back to Intel. Do you know where Intel's profits are going? No. No one does. This announcement marks the second quarter in the last three that the company has missed estimates, a string that contrasts sharply with its positive surprises earlier in 1997.
Yet investors, who putatively pay up for earnings consistency, have steadily bid up the price-to-earnings multiple they're willing to pay for Intel. Even after the selloff today, Intel still trades at roughly 20 times trailing earnings and more than 20 times expected 1998 earnings -- high for Intel historically.
When it comes to business, Intel and Disney don't have much in common. But as investments, they've performed the same way over the last several years -- spectacularly. Now both companies are signaling that their peak earnings growth may be over. Yet Wall Street just doesn't seem to care.
Why? The answer may lie in a conversation today with a well-known aggressive growth fund manager. I asked him about a company that's a substantial portion of his portfolio. He'd met with management just a day before.
So, I said, some folks think the company's valuation is pretty rich. No earnings, a highly leveraged balanced sheet, stock has tripled in the last year.
He didn't think so. Plenty of other companies in the group -- well, at least one -- are more expensive. On a cash flow basis, of course, since this company has no earnings.
So what is the company's cash flow, anyway, I asked.
He wasn't sure.
What about total market capitalization, equity plus debt?
He wasn't sure.
Now, there may be lots of reasons to hold this company. It's growing like crazy -- although that growth is mostly coming from acquisitions, not internally. It's in a pretty recession-resistant business. Etc., etc.
But owning companies starts with understanding valuations. The company we were talking about may be a great buy. Or it may be unjustifiably expensive. Without knowing the numbers, it's impossible to know. And this man, who manages billions of dollars of other people's money, didn't know them.
He's not the only investor, big- or small-time, who seems blind to the numbers. In the long run, stock prices move on the interplay of three forces: price-to-earnings multiples, earnings growth and interest rates. Multiples got high a long time ago; the S&P 500 now stands at its highest P/E ratio in almost 40 years.
If earnings are growing fast, and rates are low, multiples should be high. But as Chuck Hill of First Call pointed out on this site last month -- and as Disney and Intel confirmed this week -- earnings aren't growing so fast any more.
That leaves yields -- and yields are low. But they've gone higher over the last two months -- a fact that hasn't stopped the bulls from driving the Nasdaq up 9% and the S&P up almost 7% since the beginning of 1998.
So far this year, the bulls have shrugged off every disappointment and looked past the fact that analysts have steadily lowered their growth estimates. A possible war with Iraq, the collapse of Asia's economies, presidential scandal -- nothing has slowed the market's momentum.
But if Microsoft -- a $200 billion company that trades at 52 times trailing earnings and 15 times sales, despite facing the stiffest government opposition any company has seen in two decades -- preannounces or misses, valuation measures will suddenly take center stage once more. For the bulls, Microsoft means everything that is right about technology and growth companies. If you bought 10,000 bucks of Mister Softee when it went public in 1986, you're a millionaire today.
And Microsoft's valuation, outrageous by any standard measure, offers cover for its lesser cousins in the tech business -- and, by extension, to every stock. In the retail business, they call it the halo effect. If the Four Seasons is charging $400 a night for a room, the $200 that the Hilton down the street costs doesn't sound so bad.
No one will be able to ignore a miss by Microsoft. But then again, Microsoft's never missed.
thestreet.com
Pancho |
