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Biotech / Medical : VVUS: VIVUS INC. (NASDAQ) -- Ignore unavailable to you. Want to Upgrade?

To: Mkilloran who wrote (13592)	8/18/1998 3:26:00 PM
From: AlienTech	Respond to of 23519

Jubak's Journal Big-cap bargains -- or blunders? What makes a stock a bargain? Readers who have been with this column since last summer's first attempt to answer that question know I've got a pretty strict set of measures. A stock is a bargain if it has been so crushed by the market that: (1) It has almost no chance of showing a loss over a one-year period, even after we account for potential big drops in earnings and a decline in price-to-earnings ratio, and (2) it has a reasonable chance of returning 25% or more in a year. Only a few stocks pass this rigorous test -- no risk and potential 25% return -- in any market. But last summer, this method led me to add Cisco Systems (CSCO) and Ascend Communications (ASND) to Jubak's Picks. I passed on Pfizer and Gillette (G) because they never hit my price targets. The method I use to evaluate a potential bargain is pretty simple. Go out a year and project earnings after taking your best stab at revising analyst projections downward to take account of all the likely bad news. Then multiply your projected earnings per share by a reasonable P/E ratio. Don't simply project the stock's current multiple into the future. Instead, look at the history of the stock's P/E ratio and the direction of earnings growth to estimate what the market might be willing to pay in a year for a dollar of earnings at this company. See if that potential price is 25% above the current price. Very few big-cap stocks pass the test in this market because of what I'll call the P/E ratio problem. Stocks like Pfizer, Dell, Nokia and Home Depot have all pulled back by 10% or more in the last month, but they still trade at multiples well above those of a year ago. Even though Home Depot, for example, has pulled back 11% in the last month, it still trades at 53 times earnings, up from a 34 multiple last year. That's Home Depot's highest P/E in the last five years, and it simply makes the stock too risky to be called a bargain. Take a look at Pfizer to see what a historically unprecedented P/E ratio can do to a stock's bargain potential. At its Aug. 14 close of $101.50, Pfizer trades more than 16% below the $120-a-share level it hit in April and July. That's enough of a price decline to make me want to check out the stock's bargain potential. Analysts are projecting that Pfizer will earn $2.35 a share over the next 12 months. Their estimates haven't moved down in the last 90 days, however, and that makes me a little uneasy. I know drug-company earnings are among the most stable in the business world, but the economy does seem to be slowing a bit and Pfizer's Viagra impotence drug is implicated in the deaths of users with pre-existing cardiac problems. So maybe a slight haircut is in order. Instead of the 24% growth analysts are projecting -- a bit above the 23.5% growth rate last year -- I'll cut back to 18%. I'm absolutely certain Pfizer can make that. So I figure that by next August, the company will show trailing 12-month earnings of $2.23 instead of $2.35. (The precise earnings projection you come up with will depend on your view of trends during the next year, of course. I expect U.S. growth to slow a bit, but to stay above 2.5%. And I expect that Asia will still be at least six months away from turning around. To decide how much to cut the consensus projections for a company, I'd weigh the geographic distribution of its business and I'd also check to see if analysts have already sliced their estimates for the fourth quarter of 1998 and for calendar 1999. Companies with significant Asia exposure where analysts haven't yet reduced estimates for the fourth quarter of 1998 and for calendar 1999 would get the biggest reduction from me.) Projecting Pfizer's earnings over the next year is actually the easy part of this task. To project a price for Pfizer, I also need to decide what the stock's P/E ratio will be in a year. And getting the multiple right is far more important than nailing the earnings estimate to within a dime. For example, if Pfizer still trades at its current P/E ratio of 54 next August, my projected price is $120.42. I'm looking at a gain of 18%. If the stock retreats to its P/E ratio of a year ago, 33.1, I'm looking at a price of $73.81 next August, a loss of about 28%. And that's the problem with trying to identify bargains in this market: So many stocks (not to mention the market as a whole) are trading at P/E multiples way above either historical norms or even the stock's own recent history. Many of the stocks that have recently pulled back in price are bargains only if I assume that the market will continue to trade at the same extremely high P/E multiple. That's a pretty tall order. In early August the Standard & Poor's 500 briefly traded at a record of better than 30 times earnings -- almost double the 14.7 multiple that is the low point for the index in the last five years.