Just The Facts
Thursday, May 28, 1998
by Mark Weaver (MWEAV@aol.com)
SPRINGFIELD, IL (May 28, 1998) -- The market continued to rebound as its post Memorial Day indigestion has finally calmed down. The S&P 500 Index rose 0.49% while the Nasdaq Composite gained a more robust 0.75%. The Borefolio also did well today, topping the general market, rising 0.93%. Four Boring stocks rose while two fell and two didn't move.
In the news, Cisco Systems (Nasdaq: CSCO) announced that it has been selected by Allied Signal as its strategic supplier for network infrastructure. Allied has been a happy Cisco customer for some time having already installed more than 600 of Cisco's routers and LAN switches. Allied Signal's manager of WAN services is quoted as saying, "We've invested in the reliability of a Cisco infrastructure, and without that we would not have been able to support the growth that Allied Signal continues to experience." Cisco fell $3/8 in spite of this cheery report.
There wasn't any significant news on our other stocks.
After last week's column I suffered through a barrage of e-mail from angry Pfizer holders when I suggested that Pfizer (NYSE: PFE) might have been a better value in 1990 than it is now. I reiterate that Pfizer looks pretty healthy as a company and may very well reward its investors. As noted in Greg's column on Monday, Pfizer has been a leader in financial performance.
The point of my column was not to say -- sell Pfizer!! -- but rather, it was to say, if you are looking for big winners in the stock market in the years ahead, looking at undervalued stocks is the best place to start.
I received not a single piece of mail which suggested that Pfizer, in 1998, is a bargain by any conventional measure of stock valuation. That doesn't mean that Pfizer might be such a great company with such great products that it defies definition by any valuation technique. There are many ways to look at stocks, valuation is just one of them. I happen to believe it is a pretty good one at that.
David Dreman has done some interesting work which illustrates my primary point.
In 1971, had you invested in stocks in the lowest quartile of either PE, price/book, price/cash flow or price/dividend (highest yields) and had done so in each subsequent year, you would have dramatically outperformed the market.
$10,000 invested in the 25% of stocks with the lowest PE each year would have turned into $708,000 by the end of 1996. The 25% valued the lowest in price/cash flow would have been worth $572,000. The 25% with the lowest price/book value would have been worth $685,000, and the highest yielding stocks would have become worth $415,000. The general market would have given an investor $289,000 for the same $10,000.
Even more impressively, these same stocks declined significantly less during bear markets.
Like it or not, those are the facts. The facts don't tell an investor that an individual high PE stock will fail or that an individual low PE stock is a guaranteed success. They do tell an investor where the odds are the most favorable for success.
Investing is a game best played by hitting for average as opposed to swinging for the fences. When I look at the Borefolio I am comforted when I see that five of our eight stocks are trading at valuations below market multiples. Only Cisco Systems stands out as a "highflier" with a PE of 82. Although I still can see some upside in Cisco, it would be tough to make a case for the stock being "undervalued."
In my opinion, valuation matters. But, I guess that makes me boring...
Stock Change Bid ANDW + 15/16 22.06 CGO + 1/2 35.00 BGP + 5/8 31.63 CSL +1 3/16 49.13 CSCO - 3/8 77.44 FCH --- 34.63 PNR --- 42.94 TBY - 1/4 9.69
Day Month Year History BORING +0.93% -0.98% 2.16% 28.55% S&P: +0.49% -1.28% 13.10% 76.57% NASDAQ: +0.76% -3.95% 14.28% 72.40% Rec'd # Security In At Now Change 2/28/96 400 Borders Gr 11.26 31.63 180.96% 6/26/96 150 Cisco Syst 35.93 77.44 115.50% 8/13/96 200 Carlisle C 26.32 49.13 86.61% 3/5/97 150 Atlas Air 23.06 35.00 51.79% 4/14/98 100 Pentair 43.74 42.94 -1.84% 5/20/98 400 TCBY Enter 10.05 9.69 -3.56% 11/6/97 200 FelCor Sui 37.59 34.63 -7.89% 1/21/98 200 Andrew Cor 26.09 22.06 -15.44% Rec'd # Security In At Value Change 2/28/96 400 Borders Gr 4502.49 12650.00 $8147.51 6/26/96 150 Cisco Syst 5389.99 11615.63 $6225.64 8/13/96 200 Carlisle C 5264.99 9825.00 $4560.01 3/5/97 150 Atlas Air 3458.74 5250.00 $1791.26 4/14/98 100 Pentair 4374.25 4293.75 -$80.50 5/20/98 400 TCBY Enter 4018.00 3875.00 -$143.00 11/6/97 200 FelCor Sui 7518.00 6925.00 -$593.00 1/21/98 200 Andrew Cor 5218.00 4412.50 -$805.50 CASH $5429.76 TOTAL $64276.64