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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Pruguy who wrote (41386)	12/28/1998 1:49:00 AM
From: Jacob Snyder	Read Replies (7) \| Respond to of 97611

why I'm thinking of buying CPQ puts: 1. market risk: The trailing PE of the S&P 500 is 30, the usual historical range is 10 to 20. For 1999, we're looking at an absence of political leadership, flat-to-slightly-up earnings (assuming consumer demand stays healthy), and no more fed easings (unless we have a repeat of the recent liquidity squeeze/market plunge). At best, we have an earnings recession. At worst, we have a real recession. 2. company risk: CPQ valuation is at the extreme high end of its range: PE, using trailing earnings, is 81. The 5-year range is 9 to 81. P/S= 2.6 ; 5-year range is 0.4 to 2.6 P/CashFlow=50 ; 5-year range is 6 to 50 3. OK, say the bulls, the last 3 quarters have been terrible, but that's history, and the market has bid the stock up in anticipation of 1.76 earnings for the year ending 12/99. OK, I reply, lets assume the pattern of the last 3 quarters is over. If that pattern isn't over, I think we all agrea what happens to the stock price. So, stock price of 43 divided by 1.76 in 1999 earnings gives a forward PE of 24. That number, 24, is still above the 5-year average growth rate of EPS, which is 17%. So, the wonderful rebound in earnings is already priced in. If anything goes wrong with the market, the industry, or the company, the stock collapses. 4. When you buy a toaster, you bring it home, take it out of the box, throw away the instruction manual, plug it in, and use it. You expect it to work perfectly, without requiring any upgrading or maintenance, for years. If you need to read the instruction manual, then it's not user-friendly enough. If it requires servicing, it's not robust enough. Anyway, the price of the product won't support any service. My point is: PCs are toasters, now, and Compaq's business model doesn't work for selling toasters. Since PC makers can no longer differentiate themselves on service, market share will go to the low-cost hi-volume lowest-inventory producer. The higher-cost producers may be able to protect their market share for a while, but only at a severe cost to their margins. This is exactly what has happened to Compaq for the last several years. Sales growth has been great, but margins and earnings have not been great. Dell's method of making and selling computers has proven superior to Compaq's, and will continue to do so in the future. Compaq's efforts to imitate Dell will continue to be hesitant and tardy. 5. The main thing that might make me hesitate about buying cpq puts is the chart. The stock has been in a trading range, 23-39, from mid-1997 till very recently. It has just broken, decisively, above the 39 resistance level. TA says that it will now make a large move upward. It might be prudent to buy my puts in increments, or wait till the stock stalls or makes a double top or volume falls off. Responses based on fact and logic are welcome.