The debate now raging on Wall Street is how much of a premium one should pay for companies with superior earnings growth. In the past week, research reports by top strategists at Prudential Securities, Lehman Bros. and PaineWebber addressed the valuation issue. The sharp decline in tech shares slashed the P-Es of most tech stocks. The valuations don't look as scary as they did a couple of months ago,'' says Ed Keon, director of quantitative research at Prudential Securities. But plug in the expected earnings for the companies' current fiscal year, and the average P-E falls to 80.
Bulls argue that the narrowing P-E spread makes tech a good bet.
The only reason some people see value now is because tech stocks traded at even more ridiculous levels a few months ago,'' Nygren says. Consider the comparison of old-economy stalwart 3M and tech titan Dell Computer. If you compare only P-Es, 3M looks less risky at 18.0 times fiscal 2000 earnings vs. 47.5 for Dell. But once you factor in the projected five-year growth rates for each company, the picture changes. The big question is whether tech will continue to grow earnings much faster than the broader market.