Novice Investing - Learning From Dow Jones

Date: Friday 05th 2008f September 2008 05:40:47 PM

Learning From Dow Jones - 09/28/2006

By: Novice Investing Staff

There is a lot of buzz regarding the Dow Jones Industrial Average this week as it is in the verge of breaking its all time high back in January 14, 2000. What is the big deal? The big deal is some stocks rose sharply while others plummet during the same time frame. However, the answer is not surprising if you can grasp the concept of fair value. In particular, we will compare the best and the worst Dow performer, Altria Group (MO) and Eastman Kodak

Company	2000-2006 Performance	P/E Ratio in 2000
Altria Group Inc. (MO)	220.83%	6.53
Eastman Kodak. (EK)	- 62.22%	13.3

In year 2000, Altria Group was trading at a ridiculously low P/E of 6.53. You seldom see these types of valuation unless the company is about to go bankrupt. At the time, Atria too was offering a generous 8% dividend yield. Further, the company was able to post earning growth since 2000. From earning per share of $3.67 in 2000, Altria posted a healthy EPS of $ 5.35 in 2005. That results in a 220.83% appreciation in the stock price.

Contrast that with Eastman Kodak (EK). In 2000, it has a relatively decent P/E ratio of 13. However, as digital photography took over, its traditional film business is under fire and Eastman huge profit disappears along with its fading stock price. From earning per share of $ 4.99 in 2000, Eastman reported a $ 1.86 of profit in 2004 and finally, a loss of $ 3.50 per share in 2005.

So, this answers the most commonly asked question about investing. What drives stock price? In short, profit. However, as our two examples show, you need to have sustainable profits to support the stock price. Further, it didn't hurt that Altria was way below fair value with a ridiculously low P/E of 6.53. In most cases, that will give it a double without the rise in earning per share.

In spite of that, the Dow barely budge over the six year period. Thus, that is one more reason to trust Peter Lynch. He does not believe that predicting the market will do you well as investors. The tale of Altria and Eastman Kodak is a good reminder of that.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Altria Group Inc. (MO) or any other securities.

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