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“In the late ‘90s, it was not uncommon to be asked by prospective clients ‘Why do I need you when I can just buy Cisco?’ Cisco was, and still is a phenomenal company and story. On February 28, 1990, Cisco closed at $.07. On March 31, 2000, Cisco closed at $82.00.
The interesting question is, when did it go from an earnings and cash flow driven powerhouse to a bubble? It was not fair or accurate to call it a bubble in those early years as the company was experiencing tremendous real growth. To have a bubble, the price and valuation have to achieve escape velocity from the trends of the underlying business.
Below is a table of cash flow per share and the range of price-to-earnings ratios from 1999 to 2004:
It appears from the data that the separation between a rational valuation for a premier growth stock and bubble territory began in the 1999 time frame as the PE range soared from 28 to 96. It is also interesting to see that the core business, as evidenced by the cash flow per share, was relatively steady and continued on a strong upward path with the temporary exception of 2002. The company delivered on the growth, but the investors just went crazy and severed the valuation from a reasonable reality.
That was just the start of the bubble....
Continue reading the Robert Fitzwilson piece below...
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“As investors went crazy on the public market valuations and price/earnings ratios, those inflated metrics wormed their way into private company valuations. You would hear things such as, ‘Well, if Cisco is worth that, and they use their shares to buy out our startup, that means our valuation should be a multiple of Cisco’s. After all, it is a big, public company, and we are a hot young company that’s going to change the world.’
The trouble was that these hot young companies often had no earnings and very little cash flow. Companies were valued on ‘eyeballs’ (how many people visited their site). Another bizarre valuation metric was ‘price per engineer.’ The more money you raised, the more money you could spend hiring engineers. The more engineers you had hired meant a higher valuation on that metric alone. It was a mania.
The sectors we have been highlighting are not even close to being in a bubble. These themes, technology, gold, silver, oil and energy have actually become deep value. It would have been hard to imagine, in the ‘70s, that companies such as Intel, Microsoft, Apple, Cisco and many others could become cash generation machines, or quasi-banks.
The energy companies are enabling and producing a product without which the modern world cannot function. As economically inexpensive and rich deposits are depleted, we have the opportunity to buy a sector that should continue to generate strong cash flows and dividends as the higher prices for their services and products are realized.
Gold and silver remain ridiculously undervalued. There is no bubble. Anyone who advocates investing in these resources is immediately attacked as being on the fringe. The valuations of the premier companies reflect that. There is virtually no institutional exposure when one looks at the aggregate financial assets.
We will know that these asset classes are in a bubble when we hear the phrase from the late ‘90s. It won’t be Cisco, but the masses will be asking ‘Why do I need you when I could just put everything in gold and silver?’ We are light years away from that moment measured in sentiment. We could be one evening away from it in time.”
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Eric King
Gold & A Nasdaq Stock That Rocketed 117,000% Higher
Today 40 year veteran, Robert Fitzwilson, wrote the following piece exclusively for King World News. Fitzwilson, who is founder of The Portola Group, put together a fascinating piece which covers everything from the 90s bubble, to gold, silver and energy. Below is Fitzwilson’s piece.
© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast,
rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.
August 20, 2012
