Tuesday, February 28, 2006
According to our computations, the Dow Jones 30 is approximately 15% under valued. Dow Jones 11,000 has put up a stout defense for a long time, but everyday the valuation gap widens, and in time, value will win like it always does. In my last edition, I explained that even though the Dow had pierced the 11,000 level I was not ready to lay it to rest. I mentioned that important psychological levels are usually taken out with a lot of noise caused by short covering. Since the move through 11,000 was very orderly, I suggested that it was unlikely that the shorts had covered and until they did, we would wobble back and forth across 11,000 for a while longer. As I write this, Google has just announced that they see a slowing in their business; as a result, its stock price is down 10% and the Dow is down about 1%. What does a high flyer like Google have to do with value investors like us. Nothing and everything. Google does not qualify for our portfolios because it does not pay dividends, and even if it did so, its current selling price has no relationship to any intrinsic value we know how to compute. Google is a fad. It has a wonderful business model and great services, but it is being priced like the techs of the late 1990s: as though the rules of valuation have been repealed. Google has been learning in recent weeks that value has a terrible swift sword, and in time, it visits every company. I used to say that everyday in the market means something. I don't say that anymore because I know it is untrue. Few days in the market mean much, yet there are thousand of words being written today about what's going on with Google and the greater implications it has for all stocks. I will add as few words to this total as I can. Google is not a value. The slicing and dicing it is receiving is warranted, and there will be more days like this. Blue Chip America is undervalued. The hit it is taking is not related to value, but psychology. Traders believe Google is one of the most important companies in the world, and if Google is suffering, then something must be wrong with the whole market. Today the "Sell-Dow 11,000" crowd is winning, but their costs are going up everyday and they know it. They were on the right side of the valuation knife in 2000, and they have big winners. But they are on the wrong side of the battle this time, because some high quality companies with good values are breaking out of long trading ranges. I will detail some next time.
Labels: Company Discussion