Waiting to Charge: The market soon will begin to anticipate the strengthening rebound, just as it always does

• Published in: On Wall Street 2002-10, p.1
• Main Author: Quickel, Stephen
• Format: Article
• Language: English
• Subjects: Bull markets; Fiscal years; Growth stocks; Price earnings ratio; Ratios; Recessions; Securities analysis; Securities markets; Stock exchanges
• ISSN: 1092-1370

As for valuations, remember that we are coming out of a recession. Since some of the P/E ratios in the table are based on earnings estimates for the current fiscal year, they reflect recession-reduced sales and profits that could make some current fiscal year P/Es appear a bit high. But look at the P/Es based on next fiscal year estimates. There you'll find P/E valuations based on post-recession recovery earnings. Those P/Es average a very modest 20-times next fiscal year earnings - a bit above the long- term average for average companies, but solidly in line with what P/ Es investors are eager to pay for leading growth stocks in rebounding markets - like the bull market we see developing in 2003 to 2005. Because their expected growth is so superior to that projected for average companies, the PEG ratios (P/E divided by growth) for our 42 stocks are far more attractive than those of the Dow Industrials and the S&P 500 - 1.22 versus an "ideal" of 1.00, using current year estimated earnings. Using the next fiscal year P/E ratios, their average PEG ratio is an even better 0.99. The PEGs of the Dow and S&P are a good bit higher, mainly because their growth expectations are not nearly as bullish as those of the Big Bull's watch list.