Novice Investing - Value Stock at Techland II

Date: Tuesday 07th 2008f October 2008 01:58:32 AM

Value Stock at Techland II - 11/13/2007

By: Hari Wibowo

Back in May of 2006, we observed that some of the stocks in the technology sector is fetching a Price Earning ratio of 15. And these are technology stocks that are expected to have some growth over the next several years. Thus, we have found some value stock at the technology sector back then. Fast forward one and a half year later, these stocks seem to have done well. The table below illustrates their performance:

Company	Share Price 05/06	Share Price Now	Return
Microsoft (MSFT)	$ 23.77	$ 33.38	40.4%
Intel (INTC)	$ 19.00	$ 25.29	33.1%
Dell (DELL)	$ 24.89	$ 27.17	9.16%
Symantec (SYMC)	$ 17.00	$ 17.12	0%
Average Return			20.66%

Looking at the average return, you must agree that it is a decent return for stocks that were expected to languish due to their own short-term problems. Again, this solidifies our belief of the concept of fair value of a common stock. All these stocks had an expected Price Earning Ratio (P/E) of less than 15. As you recall, a P/E of 15 means a 6.67% annual return, which is still higher than risk free treasury bond rate. Thus, we would expect these stocks to revert to its P/E of 15 fair value. Take a look at this. Last year, Microsoft has an expected P/E of 13.9, Intel: 16.3, Dell: 12.6, Symantec: 14.5.

At first glance, Intel looks the most expensive of the bunch with 16.3 expected P/E. However, Intel was expected to earn $ 1.00 last year. Now? It is expected to earn $ 1.20 per share for fiscal year 2007. Thus, its earning increase has caused Intel shares to move up further as well. Of course, you would have seen that some stocks do not move towards fair value despite a lower P/E ratio going forward. Does this make the concept of fair value invalid? Not really.

First, common stocks do not always reach fair value fairly quickly. Therefore, if you have purchased an undervalued stocks and you have done the math correctly (a.k.a predicted earning per share is equal to actual

earning per share), the stock may not move up towards fair value. Secondly, there are seasonal things that may prevent the move of a stock towards fair value; Mainly, institutional buy/sell. Institutional investors make up the majority of the trading volume in the stock market. Therefore, stocks depend on their trade to move towards fair value. For example, towards the end of the year, institutional investors will engage in what is commonly called as 'window dressing'. Thus, best performing stocks of the year will be bought up to make your portfolio looks stellar. As a result, stocks with poor performance (but undervalued!!) may be drifting lower, causing one to ponder whether they are buying the stock at an expensive price.

Thus, no worries. Eventually what is a good investment (a.k.a undervalued stock) will go up and patient investors will be rewarded. With stocks regularly going up and down in significant percentage, you may find plenty of bargains at a given time.

END

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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 Microsoft Corp. (MSFT) or any other securities.

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