Drip
Portfolio Report
Valuation Guesswork
by Jeff Fischer ([email protected])
Alexandria, VA (June 22, 1998) --A big factor in the Nasdaq's 1.4% gain was Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, a company so large that it alone constitutes a few percentage slices worth of the S&P 500 index.
Intel gained over 5%, adding $3 7/8. An investor would think that news was responsible for the stock's advance, but there wasn't any substantial news -- at all. Zippo. Intel's Merced chip won't be released in 1999 -- we still must wait for the year 2000. Several analyst ratings haven't changed -- many of them downgraded the stock in the high-$60s and are sitting on their lower ratings now. Low-end PC sales are not seeing margins increase -- they're still lower margin revenue. And finally, Pentium IIs, though always faster in speed, are always declining in price. In short, nothing has changed.
So why did the stock gain nearly $4? Well, why does Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> trade at over 50 times earnings? Why is Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> valued at $4 billion and Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> at $2.4 billion?
There are no answers to these questions -- no definitive answers -- and since there are no current answers, it makes it impossible to predict what will happen in the future as well. If you can't explain the present, you certainly can't foresee the future. Only obstinance makes you believe that your version of "How things should be" will someday certainly come to fruition. I agree with people who write that Coca-Cola is overvalued, but I think the stock -- as long as management executes -- will always carry a hefty premium, and it hasn't stopped me from sending money to its DRP almost every month nor from achieving market-beating returns to date.
This is why dividend reinvestment investing is my favorite kind of Foolishness. It takes the guesswork (which is what valuation analysis -- as sophisticated as it is -- must be in the end) and it puts much less importance on it. Rather than trying to value a company and hoping that you're right, and then putting a large part of your wealth into it, you determine what companies are industry leaders by a wide margin (much easier to do), and then you begin to invest very small amounts over time. Doing this, you lower the risk that you're paying too much for the stock with any particular investment.
We care about valuation and always have, but we've also argued that it's not nearly as important for DRP investors due to dollar-cost-averaging and time diversification.
To discuss Intel, Coca-Cola, banking or other stocks in the next day or two, hit the Drip Companies message board linked here and in the top right of the page each day. We'll have a more focused discussion for the next few days about any topics or questions that come up.
Fool on!
--Jeff Fischer
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