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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Peter Singleton who wrote (49243)	2/28/1999 12:06:00 PM
From: Knighty Tin	Read Replies (3) \| Respond to of 132070

Peter, This is what I have been trying to say for so long about valuation and internal payback on investment and was not getting it across. The true value of a stock is related to its real eps base and its growth rate. I am a bit less convinced that dividends should be counted twice, as they come out of eps. I.E, if a stock has a 5% high quality eps growth rate and pays a 2% dividend, the internal rate of return is 5%, not 7%, IMHO, while Hussman is willing to count it as 7%. So, I think things are worse than he projects. And, though I love his logic, I have some quibbles. I know, what a surprise that I would quibble. <g> And some of this is the bailiwick of a portfolio manager, analyst or strategist, not an economist. 1. He doesn't discuss the quality of eps, which, IMHO, are worse than they have been at any time during the SEC era. 2. Related to #1, he doesn't pay attention to the fact that depreciation is way understated in technology cos. eps reports. Now that tech stocks are a much larger part of the S&P 500 than ever before, this takes on some importance. The problem is simple. Your capital investments in the tech area become obsolete much faster than the law allows you to depreciate them. Despite all the hoo-haw about buying back stock and better use of capital, the real reason most tech cos. do not pay dividends is because they don't have the cash. Reported EPS may be large, but sometimes all of that plus some must be spent staying current with the technology. Even more if you hope to be ahead of the curve. This is the phenomenon known in the tech stock area as zero free cash flow. Yes, there is plenty of cash flow, but it is already spent. It is like hamsters running on a wheel. They are moving and grooving but they aren't getting anywhere. And you never get out of this situation until the overall technology becomes superseded or you establish monopoly power. True, some tech cos. have free cash flow. Microsoft comes to mind right away. But most have either negative free cash flow, MU comes to mind, or zero free cash flow, or barely positive free cash flow. Another reason so many of these cos. need capital even when they are supposedly doing well and why debt capital is so prevalent. So, understatement of depreciation both raises nominal eps and increases tax rates for tech cos, which now form more of the index. And we cannot make great ratio judgements based upon reported eps when we know there is really no or little in actual earnings. 3. I liked the zero bond analogy, as it is one I use all the time. 4. Does anyone think that the blundering herd is aware of any of this? After all, what does internal rates of return have to do with the new pair of dimes? <g> MB