No one took my challenge in message 300177 (or the parent of this message). How unfortunate.
Oh well. It is still a happy day for longs.
Instead of insults (which will be too easy and one-sided), we longs should say thanks to all the stubborn shorts who keep putting fuel in our rocket.
PS. Can't say I didn't warn people many many times on this board not to short this stock in this market.
"No, a new 'tech' comes around every 20 years or so. Railroads and telegraph operators were the tech of their day..."
Exactly my point of not using data that are too old. BTW it's not the same tech and the market certainly don't operate in the same way. Taking a 125 years timeframe without a time weighted measure that reduce the influence of events long ago and other time based adjustment reduce the overall relevance of the final result.
I do think even the 30 years time frame I took for my studies is still too long. However, as I mentioned, I took the median P/E of the ENTIRE market and not just the index since indexes don't add new companies very often (and in a timely way) and put them against liquidity measure and saw a direct coorelation. I did the same thing by sectors that are most liquid.
"... 15 was somehow considered the 'correct' valuation ..."
By whom and in which sector ? Not to mention that it is not relevant to actually making money. If you do trading simulations with actual historical market data, you just don't do better buying low P/E stocks. In fact, very few stocks achieve low P/Es by having their earning growth outpacing their stock prices because the market didn't expect their earning growth. The market ALWAYS know before anyone else. Just look at the disastrous cases of Enron and Worldcom, their bonds remained investment grade when their stocks were crashing through the floor (seemingly for no good reasons at the time and a lot of suckers just buy in on the low because they saw no news to support the drops: same type of sentiment expressed by a lot of shorts here who try so hard to re-affirm themselves there is no reasons for the rise of JNPR). Why did Enron and Worldcom bonds remained investment grade until the very end ? Because the rating agencies relies solely on reading the two companies' financial statements and paid no attention to the signals from the equity market which is ALWAYS the first to know and react. i.e. the market knew about the falsifying of info in their SEC filings and was reflecting that knowledge in the stock prices before any public acknowledgement or news. Like I said many times, unless you are an insider, your best source of information IS the market (and the stock) itself since this is the place where ALL people concerned "act" openly and publicly to protect their interest and their actions are reflected "honestly" in the stock prices. Can you say the same thing with financial statements or news for that matter ? I went long on JNPR for a lot of reasons but none from what I read from their financial statements.
"...model their future based on data in their financial statements and their recent past..."
Do you think you are more of the first ones to do such analysis or more of the last ones ? And how many people you think have already done such analysis (before you) and have acted through the equity market already and that the results of their analysis and beliefs have already reflected on the stock price ?
"...this sort of analysis are commonly ignored during market manias... "
Hey, the more you know. If you know there is a market mania going on, you may as well take advantage of it and make some serious money which is what this is all about. All the rich/cheap, fair/unfair theories belong to the ivory towers and frankly I think people ignore them during any kind of market.
> There is no such thing as tech for example until about 30 years ago.
No, a new 'tech' comes around every 20 years or so. Railroads and telegraph operators were the tech of their day.
> if you plot the overall (median) P/E of the entire market, you will see a rising pattern.
Not really. The P/E of market indexes hasn't really exibited a trend over the past 125 years, look at figure 1.2 here:
There's an oscillation around median of 15. From 1993 to the present, we've experienced a pronounced excursion from the norm, like those seen from 1925-29, and 1963-68. I presume you know how those ended.
The four spikes, incidentally, correspond to the initial exhuberance with which 1) railroads and telephones, 2) radio broadcast, 3) air travel, brand marketing & early computers, and 4) personal computers and networks were received. Perhaps in our next regularly scheduled boom in 2030, commercial nano will be the new thing. 30 years is about how long it takes a generation to forget.
Until quite recently, I had little understanding of just WHY 15 was somehow considered the 'correct' valuation for so long. Then I started doing my own discounted cash flow analyses. As you know, the value of a company (or fractional share of it) is the discounted value of all future cash flows it generates for the owner. It turns out, that using 11% as a discount factor (equivalent to the long-term returns on the stock market - think of it as opportunity cost for not simply buying the market) and a profit growth of a little over 7%, DCF analysis indicates that the correct valuation of a company is around 15 times current earnings. What's special about 7%? It happens to approximately the long-term CAGR of profits for American companies last century. So when the market as a whole deviates significantly above, or below that range of 14-16 times earnings, it is making assumptions about the economy (and human nature) that are simply unfounded on economic history.
> Now I hope we can all agree that higher in liquidity means "fairer" in numbers (i.e. stock price).
I don't. Higher liquidity, as is usual in the terminal stages of fiat currencies, forces interest rates below what the market-clearing price might be, and causes bubbles in commodity and asset valuations, as the excess credit looks for some return in every nook and cranny of the economy. So far, we've been spared inflation in finished goods (though not commodities and domestic-sourced services) largely by the interventions of the Chinese and Japanese central banks to keep their own currencies from adjusting to the oversupply of dollars.
Now, if you aren't talking about the ratio of money to real assets, and are instead discussing the transactional velocity of equity markets, I also disagree. Stock market transactions, as a proportion of the gross domestic product, increased in 1997 to a level not seen since 1929. It seems to me the liquidity seen in the intervening 68 years was adequate to ensure capital flowed to where the best risk-adjusted returns were in the private economy. Of late, it seems to be directing capital to the pockets of insiders rather than where the largest real-economy profits are...
> I don't think however you can make any judgement on future (12-24 months out) stock price of JNPR from looking at currently available financial statements since whatever information is in those numbers, they have already been priced in the CURRENT stock price.
I don't believe in the efficient market hypothesis. For companies like JNPR and AMKR, with negative or nominal earnings, I do believe its possible to model their future based on data in their financial statements and their recent past, but the results of this sort of analysis are commonly ignored during market manias or
I completely agree with your observations.
However, I don't agree with how you make of it for the following reasons:
(1) There must be a time factor or weighting scheme to your analysis. This is a different world than the one 50 years ago. There is no such thing as tech for example until about 30 years ago.
(2) You said: "At no time in the past 125 years has a market with valuations as high.."
This is actually my point: if you plot the overall (median) P/E of the entire market, you will see a rising pattern. So you may need to be open to the fact that the market do not have a static opinion on what a fair P/E should be and that acceptable P/E is only relative and not absolute. As a matter of fact, one of my studies show that a rise in P/E is directly correlated to the sharply rising liquidity of the market. Now I hope we can all agree that higher in liquidity means "fairer" in numbers (i.e. stock price). So you see, P/E have risen but it may just have risen to a "fairer" level from previous years. You have to be careful when you measure something against preconceived values in order to be certain that those values are deserving to be your benchmark.
(3) Your said: "As for P/E, it is merely a rule of thumb for mature companies.."
Per my argument in (2), I would suggest looking at the "relative" P/E to the corresponding sector or the market instead of the absolue P/E number.
(4) you said: "For growing companies like Juniper, P/E, PEG and other intuitive rules of thumb are of limited utility.."
No kidding! Like I said, plenty of companies are not making any money so should we short them all or refrain from buying any of them ? I don't think however you can make any judgement on future (12-24 months out) stock price of JNPR
from looking at currently available financial statements since whatever information is in those numbers, they have already been priced in the CURRENT stock price. However, there is one constant about a growing company like JNPR: high volatility. You can profit from it by watching the trend and hedging your position (with options) or using other volatility based derivative strategies.
Tech like JNPR have been described as over-valued as long as we have tech. Risk and reward alwys go hand in hand. You can't have one without the other. Like I said, high P/E stock and sector have much higher volatility but have the potential of much bigger returns. That's a fact. A smart investor will know how to control the volatility risk by things like options while preserving the strong upside potential. But in any case, people on this board are wondering if they should short a stock that went up 100%+ with strong growth in revenue at a market with a 40%+ gain. That's just plain nut. While you can short with caution a stock that's going up but slowing down (concaving down), never short it when it is going up and accelerating up which is the case with JNPR and QQQ as can be seen by their rising and "concaving up" moving average from 3 months to 52 weeks. Vice versa argument for longs. That IS a low numbered rule for investing.
> So having said that, what is the value of things like P/E in predicting future stock price moverment ?
You're probably correct in terms of short term trades on individual stocks, but there's a extraordinarily strong negative correlation over the past 125 years between index valuations and the performance of the market, over the ensuing decade. This is significant with using trailing earnings, but especially using 30 avg trailing earnings, or peak earnings during the preceeding decade.
At no time in the past 125 years has a market with valuations as high, or higher than they are currently on the later two measures, been up in real terms 10 years later. A regression of the trailing valuations and 10 year returns suggests that the expected real return for the US equity markets is -1.5 to -3 percent, over the next 10 years.
As for P/E, it is merely a rule of thumb for mature companies. Essentially, mature companies with P/E ratios higher than 15 are overvalued. This makes a great deal of sense if you actually perform the discounted cash flow calculation - a P/E of 15 yields approximately the correct present value for a company that is growing earnings at a 7% annual clip.
For growing companies like Juniper, P/E, PEG and other intuitive rules of thumb are of limited utility. To obtain appropriate valuations, you really need to pull out the financial calculator/spreadsheet, and perform a DCF calculation based on estimated revenue growth going forward and the company's cost structure. You can also plug and chug going backwards, to find a revenue growth the market is expecting at current valuations.
Right now, the market is correctly valuing Juniper for the following assumptions: 28% revenue growth every year for the next decade, no decrease in gross margin (ie, no competition), no increase in R&D or SG&A costs with an 11% discount rate, and most importantly, no share dilution. Given the historical results (eg, 2.6% revenue growth/share for the past 12 months, etc) and actual competitive lanscape (Cisco overhead, Huawei on the horizon), these are pretty optimistic assumptions.
12% discount rate,
I respect your comments, but am somewhat reluctant to go with past market performance in this new era. As far as earnings are concerned, the market analysts, i.e. THOMSOM, have set earning expectations so low that most companies can meet them with little problems. There are a lot of open questions as to whether the indexes can hold their gains. Right now, analysts like BELKIN are concentrating on valuation. Larry Wachtel said today that the tech valuations are too high. Last year we had 2 false starts (you know the market is 6 months ahead). UCLA put out some charts a few months ago that did a correlation on the indexes by 3 different methods and by looking at past performance, it showed a market crash just about now. Time will tell.
If 40-50% broad market (index) gain is not a bull signal then what is ? Please don't tell me valuation again. Like I said, if earnings improve (like it is now), the only way to stay in a low valuation is if stock prices stay low but that's just not going to happen. Furthermore, past data indicates that stock prices always BEFORE the facts rather than AFTER it and it always outpace improvement(or deterioration) in earnings. i.e. you know the bull market is coming to an end if P/E starts dropping even though earnings have not yet deteriorate and vice versa for a bear market.
At this very moment however, earnings have already improve from the lows and stock prices are outpacing earnings by increasing margin, as can be seen by the 40%+ gain in the broad market and ever increasing P/Es: a clear onset of a new bull market. I'll look for the P/Es curve concaving back and start flattening out before even think about a short/PUT position.
The worst thing any investor can do is to fight the tape.