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Value Stock at Techland II
In May 2006, we observed that some technology stocks were reaching a price/earnings ratio of 15. And these are technology stocks that should see some growth over the next few years. Thus, we found value stocks in the technology sector at the time. A year and a half later, these stocks seem to have done well. The table below illustrates their performance:
Share price 05/06
Share the price now
To come back
Looking at the average return, you have to agree that this is a decent return for stocks that were set to languish due to their own short-term issues. Again, this reinforces our belief in the concept of fair value of a common stock. All of these stocks had an expected Price Earnings Ratio (P/E) of less than 15. As you will recall, a P/E of 15 means an annual return of 6.67%, which is still higher than the stock market rate. Risk-free treasure. Thus, we would expect these stocks to return to their P/E of 15 fair value. Look at this. Last year, Microsoft had an expected P/E of 13.9, Intel: 16.3, Dell: 12.6, Symantec: 14.5.
At first glance, Intel seems the most expensive of the bunch with an expected P/E of 16.3. However, Intel was expected to earn $1.00 last year. Now? It is expected to earn $1.20 per share in fiscal 2007. So its increased earnings also pushed Intel shares higher. Of course, you would have seen that some stocks do not come close to their fair value despite having a lower P/E going forward. Does this invalidate the concept of fair value? Not really.
First, common stocks don’t always reach their fair value fast enough. Therefore, if you bought undervalued stocks and did the math correctly (i.e. expected earnings per share equals actual earnings per share), the stock may not rise. to fair value. Second, there are seasonal elements that can impede the movement of a security towards its fair value; Mainly, institutional buy/sell. Institutional investors account for the majority of trading volume in the stock market. Therefore, stocks depend on their trade to move towards fair value. For example, towards the end of the year, institutional investors will engage in what is commonly referred to as “fronting”. Thus, the best performing stocks of the year will be purchased to make your portfolio look stellar. As a result, poorly performing (but undervalued!!) stocks may drift lower, raising the question of whether they are buying the stock at a high price.
So, no worries. Eventually what is a good investment (undervalued stocks) will rise and patient investors will be rewarded. With stocks steadily rising and falling in large percentages, you can find plenty of bargains at any given time.
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