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I saw the article and it made me think like this: Given the huge rise from these leading stocks, if one is sure that one has in fact identified a leading stock, then that stock should be held for a long, long time. That means that much of the sell advice handed out on a daily basis is useless.

This was Philip Fisher's approach, of course. He felt he could identify a leading company with a 90% probability.

But don't underestimate how hard it is to hold (assuming that you can identify a leading company when it isn't yet a leading company). I remember the worry about Dell in 1994, when it was down significantly. The 10 year chart ( shows not much action till the last few years. (I think the chart distorts things because of the stock splits along the way.)

<I've always believed that with some effort anyone can be a millionaire in North America.>

And especially when the market (at least in the US) co-operates so famously, as has happened the last 4 years. Graham's view of return from stock investing was that with intelligent effort one could reasonably expect a return about equivalent to the market, but that to achieve a truly superior return was quite difficult. The difference between return of course can be overcome given sufficient time. (I'm reminded of the old joke about "How do you make a million dollars? Simple, start with $910,000 and earn 10% on your money.")

But let's enjoy these large, short-term returns (assuming you're in the right stock; I speak wistfully, having passed up JDS in Oct 98 and subsequently) while we can.

I was looking at Schering-Plough last night, from its 1998 annual report. Absolutely beautiful numbers: from 1993 to 1998, ROAE averaged 56.1%, and was very consistent; sales growth was 13.8%, also consistent, and the last two years showed better growth; net income up 16.6%; eps up 20.7%; a slight upward trend in net margins during the period, and very high net margins, too, averaging 20.8%, also consistent. Hardly any debt by 1998. Shareholder equity growing at 20.4%, consistently. Free cash flow growth at about 24% a year, though the growth rates on this metric are more volatile.

But from about mid-1997, the p/e began to rise significantly as investors have bid up the stock. Because of the lower p/es during 1996 and before, the 6 year average hi p/e is 26.6 and the low is 15.7. During 1999 (and 1998 was similar), the hi p/e has gone to 44 and the low to 30.

Projecting eps for 5 years (from 1998), one can get a range of outcomes, from $2.17 to $3.79. I chose $2.82, which represents growth at 19% for the next five years, a little less than the company achieved in 1993 to 1998 (at 20% growth eps is $3.04, so you can calculate the difference arising from my lower choice).

If you apply the average p/e (ie, the average of the high and low, which is 21.2) to the $2.82 eps, you get an estimated high price of only $59, which from current levels of about $45 (SGP had a hugely volatile week this past week), plus the annual 1% div yield, gives an expected total return of ony 6.6% a year.

If you believe that the current high p/es will continue well into the future, at $2.82, then at a p/e of 30, the upside price becomes $84.60, which with the dividend is about 14.5% a year.

Clearly you're not making a decent return on investment unless the p/e continues at well above 30.

Note, too, that to reach the 6 year average p/e of 21.2, the stock would have to drop to $28. It did touch down to about $39 this past week, but quickly bounced up to the upper 40s. Here's a chart:

I guess my point in mentioning SGP is that one's quest to become a millionaire is hampered when the leading companies are very expensive, as many of them are these days.

(Oracle is another case in point; beautiful numbers again, extremely consistent, but the rise over the last two months, has destroyed much of the benefit of the expected growth -- unless the strangely high p/e's continue. Oracle's 5 year average hi p/e was about 50; it's now trading at double that, because of rise since early November. That means that if the stock merely goes down to the average hi p/e, it will drop in price by 50%. Ouch. No wonder the insiders are selling at these levels. Here's the chart:

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