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The markets don't run on reality, but on perception. A 30 PE ration is not
high if a company is growing at 30% per year or better. It is excessive when
a company is growing at 5% per year. It is easier for $200,000,000 company
to grow at 50% per year then a $3 billion company. So let us keep everything
in perspective. The question is can the companies trading today at high
multiples grow at those rates, if not then they are over valued technically.
Does that mean the price will fall? No, the perception might be that it is a
take over candidate or there is a new product on the horizon or a more
fertile area of growth is just over the horizon. So it is perception, not
fact that drives stock prices. I remember not to far back when the banks had
all those bad loans to foreign countries. If they put together their balance
sheet and went to get a car loan, they wouldn't qualify. Yet the stocks kept
rising for another year, then the crash came. Not on the facts of the
matter, but on the perception of things to come.
The funds and analysts play tricks with their analysis. Some use growth
rate, others us cash flow, and still other use return on equity. There are
those that use up to 20 fundamental criteria to judge a company. In my
opinion, it doesn't make any difference what the company does, what its
future is, or what its fundamentals are, the only thing that really counts is
can I make money trading this stock either long or short. Being
fundamentally right is not the answer. As in Blackjack, the object is not to
get closest to 21, the object is to beat the dealer. That is the only way
you can make any money. In the stock market the object is not to be
fundamentally right about the company, but to make money on its price
action. Ira.
John Cappello wrote:
> Perhaps the most basic tool of Fundamental analysis is PE ratio.
> Numerous attempts at correlating this have been made and often the
> Technical Analysis defies fundamental logic.Dividend yield currently
> at 1.5% also is historically low. But they both can work in tandem
> with long term Technical Analysis.
>
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