Its a bargain hunter's dream today. There are two big trends in the stock market right now that are creating some bargain stock prices. One is the mortgage-backed securities meltdown, which has depleted many portfolios. People running these portfolios are reballancing them, which means selling stocks. They are selling stocks regardless of their underlying values.
The second is fear. People lost bundles in 2000-2001 and take flight easily. Many of the stocks that sank in 2001 had no earnings, some times they did not even have revenues to back their market capitalizations. Today stocks that are very profitable are being dumped - that is just plain fear.
Of course if there is a world-wide Great Depression starting next month, selling today will seem smart. But all reports are that the global economy is robust. There are weak spots like Japan and the U.S., but the weakness is mild and probably temporary.
There are, of course, frothy stocks out there. There are always some, just as even in an overpriced market you kind find some bargains. For froth, Apple, Google, and Intuitive Surgical (ISRG) leap to mind. But even with these three, they are solid companies that generate substantial profit; it is investor enthusiasm, the idea that these stocks only go up, that makes them frothy.
I have listened to a lot of analyst conferences this last two weeks. Some I am paid to listen to (I can't list those). Some I own, like Napster, Microsoft and Dendreon. Others I cover because of their general interest in the techonology domain and because I have taken to posting summaries of them at Openicon. These include Maxim, Onyx, and yesterday Cisco. Almost all these companies are doing well and have lower than reasonable stock prices right now.
Cisco (CSCO) is a good example of an undervalued stock. It is a gigantic company, yet its revenues for Q3 2007 grew over 16% from Q3 2006. Its earnings rose an amazing 37% over the same period.
Given that safe cash-like instruments that pay even 5% interest are getting hard to find, you would think that today a rock-bottom price for Cisco stock would be at about 20 times Q3 earnings. Given its growth rate, even thirty times earnings would not be adventurous. As I write you can buy the stock for $30.04 per share. If you could buy the whole company for that you would get the market capitalization, which is $182.7 billion. GAAP earnings in Q3 were $2.2 billion. Annualized that is $8.8 billion. Divide into the market capitalization and you get a P/E (price to earnings) ratio of 20.8.
But the most likely scenario is that a year from now revenues will be up again in the 15% range and earnings will be up 20% to 35%.
The only thing I don't like about Cisco is that it does not pay a dividend. I like dividends; I am not a fan of stock repurchases unless a company has a lot of cash and has very undervalued stock.
Be sure to see my summaries of Cisco analyst conferences.
Buy low, sell high. To be able to sell high you have to buy low. Yet I watch investors, even professional investors, buy high and then dispair and sell low. Today Cisco is low. And always balance the risk in your portfolio.
Always be careful how much you spend, no matter how rich you are or think you will become.