Jubak's Journal Recent articles: • Where have all the growth stocks gone?, 8/19/2003 • 5 ways to make the big trends work for you, 8/12/2003 • 5 big trends investors must watch, 8/5/2003 More... | Jubak's Journal Why it's so tough to pick stocks now Some shares look cheap measured against near-term growth rates -- and expensive against forecasts of growth down the road. Are analysts being too cautious? By Jim Jubak Take a look at shares of Walt Disney According to Wall Street analysts, the company is likely to earn 82 cents a share for the fiscal year that ends Sept. 30, 2004. If that happens, the company would boost earnings by more than 30% from the previous year, a huge improvement over the 1.4% decline the company is likely to show this fiscal year. It's also much better than the average 7.4% annual decline over the last five years. No wonder that Disney stock is up better than 30% this year. But heres where it gets tricky for Disney investors.
If Disneys long-term growth rate is anywhere near the 32% the company is projected to rack up in fiscal 2004, then shares are cheap, even after this years run-up. The stock trades today at a price-to-earnings ratio of just 26 times fiscal 2004 earnings. A stock trading with a multiple of 26 and growing earnings at 32% a year deserves a "buy" rating. Slowing down But few Wall Street analysts expect Disney to keep growing earnings at 32% a year after that huge bounce in 2004. The consensus estimate is for just 14% growth on average over the next five years. Disneys long-term earnings growth rate, according to these estimates, is closer to 10% than 30%. And paying 26 times earnings for 10% growth cant be called a bargain. This valuation problem is even worse for technology stocks. For example, storage hardware and software leader EMC Corp. After climbing 100% this year, the stock sells for 42 times the 2004 consensus earnings estimate. That's cheap for a company growing earnings at 82% a year but expensive for one showing just 16% growth. Investors who believe that the rally that began in March still has room to run say that Wall Street analysts are too pessimistic in their long-term growth projections. And certainly, stung by criticism over their overly bullish growth projections in the run-up to the bubble of 2000, Wall Street analysts could now be overreacting in the other direction. The bullish case For example, these bullish investors ask, is Cisco Systems Investors who believe that stocks have already discounted 2004 and 2005 earnings growth, on the other hand, argue that bullish investors are guilty of turning a short-term bounce in growth into a long-term trend. All the evidence, these investors add, even from companies such as Intel Which group of investors is right? We wont have solid numbers on the long-term strength of the recovery until well into 2004 or 2005. By time, if the optimists are right, most of the easy profits will be gone, which is why a third group of investors is busy hopping from momentum stock to momentum stock now. Their hope is that they can reap early big gains from a recovery but avoid getting caught holding the bag if the recovery turns out to be disappointing. Their moves ensure that the market will have a lot of activity. But they dont provide any answer for fundamental investors who want to know if stocks are cheap or expensive. Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||
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