Intel May be a Good Investment, but 1999 is Irrelevant

Investors need to ignore the frenzied noise from commentators about where stocks traded seven years ago.

I was watching a little CNBC in the mornings at the gym this week.  Long ago, I gave up watching it for news or investment ideas.  Now, I think that I just watch it primarily because one of the anchors is funny (Joe Kernen) and one is cute, at least on TV (Erin Burnett).  I always enjoys listening to the parade of market commentators who come on the show - most are lacking ideas and saying to sell stocks that have already fallen dramatically or buy those that are completely overvalued.  These folks blow with the wind - when the market is up, they are chipper and tell everybody to jump in when it is down they are solemn and talk of further falls to come.

When I was getting my MBA, I was taught many different forms of analyzing companies.  There are a series of tools that you can use to analyze what a company should be worth on the basis of its growth prospects and a separate series of tools that you can use to analyze what the company should be worth on the basis of its current or trailing performance.  Most successful analysts use and develop these tools and try to get an edge by applying them or interpreting information slightly differently.

This week, some CNBC reporters and some of their regular commentators introduced an entirely new method for valuing stocks.  I would call it the where-the-stock-traded-seven-years-ago method.  While a stock's price seven years ago is noteworthy (barely), it is unproven and especially dangerous given the bubble conditions of the market at that time.

The analysis goes something like this: "General Electric is up $1 today to $39, and while this is at a 5 year high, we believe that the stock could easily move right up to $60 which is where it was 7 years ago.  We also like Home Depot which was up $2 yesterday and still trades at 60% of its valuation 7 years ago."

While this analysis is flawed and ignores the fundamentals of the businesses (which for GE are especially bad, IMHO), it could also be contradicted by a separate valuation method which would call for them to trade where they traded 4 years ago (which, of course, was much lower).

If the market gets more and more frenzied (which it may, but may not - anybody's guess), I would expect next to hear commentators calling for more and more stocks, including some of the key tech names, to trade much higher in relation to their values 7 years ago.  Momentum, for example, seems to be building behind Intel among the market pundits with Barron's starting to push it over the weekend.  There is some light in Intel today - their margins are improving, their creativity is back, and they are destroying their competition again.  There may be very valid reasons to own the stock.  Where the stock traded in 1999 is not one of them.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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Comments

  • Anonymous

    June 25, 2007

    This is a great article!! I agree completely, especially that 1999 is not the measure.

  • Anonymous

    July 17, 2007

    I do think that Intel and the rest of the chip stocks are getting ready to roar higher - they are at the right place in the cycle. But, I agree that some caution is warranted in this market generally.

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