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Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank -- Ignore unavailable to you. Want to Upgrade?

To: Jenna who wrote (27079)	3/11/1999 11:39:00 PM
From: Jenna	Read Replies (2) \| Respond to of 120523

EVA.. Economic Value Added.. more valuation models.. seems that everyone wants a tool to measure whether stock prices are overvalued or undervalued the more they look the more elusive it becomes. Eventually they say that stocks like AMZN and AOL will finally have to cough up something besides just sales and revenues to justify such faith in their future prospects. A new valuation tool that is interesting is Economic Value Added.. (EVA) www.eva.com it is calculated by subtracting the cost of capital from operating income. The theory is, the capital that a company burns up doing business is likened to the rent you pay on your home. It should be reasonable according to how much you are earning. Traditionally a company invests a sum say $100,000 to generate capital (say $8,000 a year which looks like 8% on first glance) but what if the debt accrued and the capital costs them 10% because they could have made more than 8% on another investment or payments on debt..cost them even more than the gains, the return on capital of 8% that looked so good before is actually -2% now. Companies whose EVA is positive (i.e. that means the cost of their operations is less than the 'return of that capital' and they are earning) the theory is companies with positive EVA are creating more shareholder wealth over time. and companies like General Electric, Coca Cola, Microsoft, Merck, and Intel.. while AOL has a negative EVA. According to this model AOL has a return of capital of 9.7% but the capital costs the firm approximately 20%, which means AOL isn't even close to the clearing the EVA hurdle. With an EVA of -10.3%, AOL's entire market value is dependent on the tenuous prospect of future growth. Just how much growth? At its current operating margin of 8%, the company needs to average more than $170 billion in annual gross revenues into perpetuity - more than General Motors - to justify a market price of $155... Put another way, AOL must lock up 1 billion subscribers (roughly one-sixth of the world's population) at $200 a year, and hang on to them. Of course this is just a theory and this EVA is being adopted by ....such Wall Street icons as Credit Suisse First Boston and Goldman Sachs and no less a guru than Abby Joseph Cohen has even endorsed it. Just mentioned this to keep the balance here. We enjoy our internet gains and I am also holding for the 1-2 month periods, but as for putting these away for your kids education or your retirement I'm not that sure. Only the strong will survive.. You still need those nice little boring stocks like SPLS, GE, LLY, etc round our your portfolio. and that is why I like to take profits usually within one week from the higher flying ones. The bubble might never burst but if it does, I don't want my financial future dependant on the PRGY's and EPAY'S staying power over time.