Enron Mail

From:bounce-smallcapdigest-871164q@lyris.smallcapnetwork.net
To:h..lewis@enron.com
Subject:Are P/E's Still Too High?
Cc:
Bcc:
Date:Fri, 26 Oct 2001 16:45:25 -0700 (PDT)


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[IMAGE] VOLUME 01: ISSUE 08 [IMAGE] [IMAGE] [IMAGE] [IMAGE] [IMA=
GE] [IMAGE] Dow Jones 9,545.17 + 82.27 7:40 pm EST, Fri., October 26, 200=
1 [IMAGE] NASDAQ 1,768.96 - 6.51 For info, visit www.smallcapnetwork.net =
[IMAGE] S & P 500 1,104.61 + 4.52 To be removed, please click here . [IMAGE=
] Russell 2000 438.65 + 2.69 [IMAGE] Dear SmallCap Network Members:=
Wall Street pros continue a rather heated debate over market valuations, =
with battle results unfolding with each and every twist and turn of the pop=
ular averages. Are price-to-earnings (P/E) multiples on the broad market st=
ill too high? We continue to do considerable research on this subject, and =
have some good news and bad news to report. Let's get the bad news out of =
the way first. By historical measures, current broad market value remains r=
elatively high. The P/E ratio on the S&P 500 has averaged 15 times earnings=
over the past 40 years. Today, the earnings multiple on the S&P 500 stands=
at just over 29 times and is projected at 21 times next year's consensus e=
arnings forecast. At the recent September 21 low-water mark of 965.80, the=
P/E multiple on the S&P 500 got down to 25.6 times, still well above the 4=
0-year average. What most Wall Street firms are reluctant to tell is the fa=
ct that the average P/E multiple at bear-market bottoms over the past 50 ye=
ars has been 11 times earnings. This is hardly reassuring if you consider =
yourself more bull than bear. That's as far as we're going with the bad ne=
ws. Suffice it to say we are reluctantly bullish, so let's get to some good=
news. First, the five-year high P/E multiple on the S&P 500 was 50.16. (We=
were unable to confirm this, but believe this could represent an historic =
all-time high.) Fortunately, this P/E multiple was achieved at about the sa=
me time many fledgling (and now-defunct) Internet start-ups were trading at=
50-100 times SALES not earnings. [IMAGE] The low P/E multiple on the S&=
P 500 was 17.48 times earnings a full five years ago. The broad market was =
in an advance that saw it double from October of 1996 to March of 2000 befo=
re crashing 40% from its peak. The P/E on the S&P was cut in half by the ti=
me it hit its September 21 low. While there continues to be downside risk, =
this has to be considered pretty good news going forward. The good news fo=
r individual investors doesn't end there. Over the past 40 years inflation =
has run at an average of 4.4% but is holding steady at 2% today. The averag=
e yield on 10-year Treasury notes during the same period is 7.3% but today =
the yield is down to just 4.6%. Combine this with the fact that money marke=
t funds hold around $2 trillion in cash (versus an $11 trillion total marke=
t capitalization) and the outlook for stocks begins to brighten just a bit.=
Whether P/E's continue to contract, hold steady, or expand is really a fu=
nction of earnings performance going forward. Estimates for 2002 earnings o=
n the S&P 500 have continued to contract as the economic slowdown drags on.=
The challenge for the 500 companies that make up the S&P average will be t=
o beat those reduced estimates next year. With the threat of inflation unde=
r control and interest rates at a 40-year low, large-cap corporate America =
has an excellent foundation to produce some positive surprises next year. =
The challenge for the individual investor is to find opportunities for grow=
th in a marketplace littered with growth-stock casualties. This is also why=
many Wall Street professionals have singled out micro and small cap value =
stocks to out-perform the broad market over the next 12-18 months. Why? Bec=
ause they are under-followed and many of them are considerably undervalued!=
AN UNDER-VALUED MICRO CAP STOCK IN REVIEW One company we've uncovered th=
at represents a solid speculative micro cap value is M-Wave, Inc. (NASDAQ: =
MWAV .) MWAV manufactures microwave frequency components and high-frequency=
circuit boards using Teflon-based laminates. These products are widely use=
d in variety of applications for wireless telecommunications and Internet s=
ervice products. For the six-month period ending 6/30/01, MWAV's revenues =
totaled $38 million up from $17.3 million while net income rose to $2.8 mil=
lion from $926 thousand. With no known analyst coverage, MWAV is trading at=
a market capitalization of about $19 million-just 1/3 of last year's $57 m=
illion in revenues. Even more intriguing from a valuation standpoint, MWAV=
currently trades at 3.28 times trailing 12-month earnings and just a shade=
over 1x book value. The Company announced revenues were on track to exceed=
last year's levels, and they project $100 million in revenues in the next =
two to three years. Some investors may shy away from companies in this gro=
up because they have been pummeled over the past year and a half. Regardles=
s of its past performance of its stock price, MWAV's revenue growth is proj=
ected to grow by over 75% in the next two to three years. MWAV shareholders=
have excellent upside potential from current levels. In fact, according to=
the NASDAQ, three new institutional shareholders have reported adding new =
positions in MWAV over the past six months. The fundamentals look pretty s=
olid going forward. Let's take a look at the technical outlook. The chart b=
elow highlights MWAV shares trading at a $15 high as late as February. When=
the market peaked in 2000, MWAV shares hit an all-time high of $16.94. MWA=
V hit a closing yearly low of $3.70 on September 20, 2000. [IMAGE] Share=
s of MWAV represent a very good value for speculative investors at current =
levels. Downside risk of about 15% appears to be buffeted by the $3.80 book=
value of the Company. The $19 million market cap represents just 20% of an=
ticipated forward revenues of $100 million whether it takes two to three ye=
ars get there. We believe MWAV has an excellent opportunity to hit their r=
evenue goal and see their market cap expand to 1x revenues at some point in=
the next two to three years. In fact, if the Company were to reach a reven=
ue valuation of 1x on a trailing basis, a 300% return from today's closing =
price would be realized. On a worst-case scenario, MWAV shares appear to ho=
ld 15-20% downside risk. The SmallCap Network believes MWAV has an excelle=
nt chance to retest its all-time high IF they achieve the revenue results t=
hey have publicly stated they are targeting. With 4.57 million shares outst=
anding, achieving a $100 million market cap would produce a $21.88 share pr=
ice at some point in the next two to three years. In our view, 400% upside=
potential versus 20% downside represents a risk/reward scenario (20-1) we =
are perfectly willing to live with regardless of whether the broad market i=
s over, under, or fairly valued. We'll look forward to presenting more of t=
hese types of situations in the weeks and months ahead. SmallCap Network M=
embers are advised this is neither an offer to sell nor a solicitation to b=
uy securities. Members are advised to perform their own due diligence and u=
se caution when buying andselling micro and small cap stocks. If you'd lik=
e to update, change, or add a new email address please click here . [IMA=
GE] D I S C L A I M E R : The SmallCap Digest is an independent electro=
nic publication committed to providing our readers with factual information=
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d investment advisor or broker-dealer. All companies are chosen on the basi=
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ward maximizing the upside potential for investors while minimizing the do=
wnside risk, whenever possible. Moreover, as detailed below, this publicat=
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Securities Dealers ("NASD") at http://www.nasd.com . We also strongly reco=
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Fraud, which can be found at http://www.sec.gov/consumer/cyberfr.htm . Re=
aders can review all public filings by companies at the SEC's EDGAR page. T=
he NASD has published information on how to invest carefully at its web sit=
e. =09

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