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I am giving up the P/S, P/E, PEG habit. I will no longer use these metrics in any analyis. In sympathy with the 12 step program I acknowledge the existence of a higher power. The market. It is time to factor that power into my analysis.

Why give up P/S, P/E and PEG?

They are meaningless.

Geoff Moore writes an elequant note on historical P/E ratios. Bruce Brown write an elequant rebuttal. I read and reread both. I remain confused. Where is the problem?

Well, perhahps Geoff and Bruce are poor writers and cannot argue a point. Uhmmm, that seems unlikely since Geoff is the best writer in technology today and Bruce is one of the strongest analysts. The problem must lie elsewhere.

Well, perhaps I lack that capacity to understand the argument. Uhmmm, that seems unlikely. I am reasonably bright and informed. It says so right here on my brochure. If I can learn about photons, 120 nm semiconductor process, telecommunication industry economics, I might be able to follow a discussion on price metrics in the stock market.

So, perhaps the problem is with the subject. Let's take a look ...

In all three of these measures, we have the following elements - Price, Sales, Earnings and Growth. Let's take a look at each.

Price - hold on a second, I thought we were all fundamental analysts here. Why is the first letter of each measure a technical indicator? There was this English guy, Adam Smith, who wrote about Price being a function of supply and demand. He didn't write at all about the intrinsic value of a widget or commodity effecting price. Just supply and demand. As far as technical analysis is concerned, using Price alone with no other context is ludicrous.

This looks like the beginings of a problem. We are trying to do brain surgery with the heart surgeons tools. Ooops.

Sales - Revenue is a reasonably solid measure. Software companies can manipulate the number but only for a short period of time.

We seem on solid ground with this one.

Earnings - Off solid ground, through the looking glass and into wonderland. Earnings reports have become so managed, controled, distorted that they are now almost irrelevant. Some companies, when it is to their advantage, issue two earnings reports. The pro forma earnings - earnings before accounting alchemy, and GAAP earnings - earnings after accounting alchemy. Makes you wonder about the companies that don't issue pro forma earnings, doesn't it!

Growth - Last summer I developed a spreadsheet with almost 150 technology companies list. Revenue, earnings, YoY growth, QoQ growth and projected growth from the learned analysts. I noticed something interesting. The lowest projected 5 year growth rate was 35% and the highest was 55% and the majority were around 42% - 45%. Odd, I thought to myself. I though technology markets were winner take all affairs. Why are all the spoils being spread so evenly amongst all the players.

Then I realized. We don't have a clue about growth so we just average it out across every company. Future growth is just what it says - future. We don't know. We can't know. Technology markets are complex, dynamic systems not well suited to linear projections. We need to know so we pretend like the growth projections have meaning.

In summary:
Price - inadequate technical indicator;
Sales - reasonably solid fundemental measure;
Earnings - accounting myth; and,
Growth - a consensus fib we preted to believe.

Mix them all together and what do you know? You know what a companies sales were and you know the price of it's stock today. Nothing more. Nothing less.

This is not much to be the base of the entire framework of equity analysis we use.

At least I know why I get confused. The subject is meaningless. Historical P/E comparisson is meaningless. Future P/E projection is meaningless. PEG is a knowing fib based on meaningless data (sorry augie).

So, is all lost? Not in the least.

What's a boy to do?

Go eat the lovely steak his wife just cooked and write part 2 later.

Paul
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