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

To: JRI who wrote (18510)	10/29/1998 9:21:00 AM
From: Bob Davis	Read Replies (1) \| Respond to of 77400

John, Good, well thought-out questions. I'll try to answer them in the order in which you asked them. Re "backtesting" - Actually I did "back-test" the model. You can see the results of this back-test in the chart, which compares "Monthly Trading Range vs. Intrinsic Value". As you can see from these charts, which can be found on the individual pages dedicated to each of the stocks analyzed, "CSCO's actual price ranged quite closely around its "Intrinsic Value" until the fall of 1997, when it began to slowly ramp upwards and away from this value". And DELL was actually substantially undervalued until the beginning of this year, which also can be seen on its respective chart. From these charts it should be very clear that neither of these stocks have "been (mostly) overvalued during the last several-year period". In fact, the "fundamental shift of (the criteria) of how the market values/has valued (that) stock" occurred quite recently. These stocks generally have been priced by the market near their "intrinsic value" for some time prior to this "shift". Net-net, if the market returned to its historical valuations for DELL and CSCO, it would lead to a fairly dramatic price decline. Re your use of the word "wrong" - there is no "right and wrong" expressed in my article and in no way am I "assuming that we are all getting it wrong". The spectacular historical price increases that DELL and CSCO have enjoyed would make such a statement on my part look very silly. In fact I say exactly the opposite: "Now - this does not mean that I feel that these three overvalued stocks are going to head downwards from here." But I do feel that there is "one powerful downward bias working against these stock's continued climb, and that is their intrinsic overvaluation." Re your question about "premiums" - The Napeague Letter normally applies these valuation tools to small-cap stocks, for which there are no forward projections other than those which I develop myself. If you take a look at one of the TNL Analyses you will see that my projections are fairly detailed, and have been relatively accurate over time (very few surprises…). When I screen the market, I initially look for Companies whose earnings growth has not been reflected in their market price; a Company with a weak track record doesn't make the cut. However, for the "Pillars" I relied on published securities analyst projections. If I were to continue this process (and I am considering it…) I would undoubtedly not profile "a stock that has a forecasted future (annual) growth rate of 30%….but has never achieved one quarter of growth of 30%". Net-net, I think that I have encompassed the "premiums" issue. Keep asking questions. You ask good ones. Bob Davis The Napeague Letter napeague.com