Message-ID: <8322005.1075851523121.JavaMail.evans@thyme> Date: Fri, 26 Oct 2001 16:45:25 -0700 (PDT) From: bounce-smallcapdigest-871164q@lyris.smallcapnetwork.net To: h..lewis@enron.com Subject: Are P/E's Still Too High? Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: "SmallCap" @ENRON X-To: Lewis, Andrew H. X-cc: X-bcc: X-Folder: \ALEWIS (Non-Privileged)\Deleted Items X-Origin: LEWIS-A X-FileName: ALEWIS (Non-Privileged).pst If you are reading this message in plaintext or if you have an AOL address = you must click on this link: http://www.smallcapnetwork.net/archive/listser= v/20011026-2.html and wait for a web page to automatically open up to prop= erly read this newsletter.=20 [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 . 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We encourage our readers to invest carefully and read the inves= tor information available at the web sites of the Securities and Exchange = Commission ("SEC") at http://www.sec.gov and/or the National Association of= Securities Dealers ("NASD") at http://www.nasd.com . We also strongly reco= mmend that you read the SEC advisory to investors concerning Internet Stock= 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 --- You are currently subscribed to smallcapdigest as: andrew.h.lewis@enr= on.com To unsubscribe send a blank email to leave-smallcapdigest-871164Q@ly= ris.smallcapnetwork.net