留意市盈率

A quick lesson in wiggle reading: The use of standard price and earnings charts topot good buys (and bad) in growth stocks.

By Peter Lynch

On my watch at the helm of the Magellan Fund , I often consulted a chart book to check the bearings of companies in the portfolio.Many investors focus on recent price, but I like to refer to certain 10-year and 35-year charts of earnings and price to give me a clue as to a stock's future value. The charts I use arepublished by Securities Research Corporation. A subscriptionis expensive, but many libraries carry the latest copies, sothey're easy enough to find.

Perhaps you follow the progress of companies with the price-to- earningsratio, or p/e. A chart will tell you more: It tells the storyof the ongoing relationship between the P and the E. It's likea tacking duel in a sailing race. As the earnings line (the E)gains or loses ground, the price line (the P) zigs and zags aboveand below it. E is the reality of a company's performance, whileP is led around by Wall Street expectations. Each chart revealssomething important about the way investors perceive a company.

The chart of the Standard & Poor's 500 Index (shown on the nextpage), which tracks earnings and stock prices of 500 large companies lumped together, lifts the fog from the market at large. We seethe E tailing off in the recession of 1990 and 1991, while theP was on the rise. The P was ignoring the drop in the E becauseinvestors anticipated the economic recovery that began in early1992.

To catch up to the rising P, the E basically had to double from1991 to 1994, which it nearly didŠtaking Wall Street by surprise.In 1994 alone, the E was up 40 percent while the P went nowhere.Then in 1995, the E was up another 20 percent, for a combinedgain of 65 percent in two years. This phenomenal rise in earningsis why the P in stocks had such a run in 1995.

This sort of chart reading works best with growth companies,ten of which also appear on the next page. I've also thrown ina cyclical, General Motors, for variety's sake. You can tella growth company because the E keeps on a steady course, withearnings higher each year. Once you've identified a growth company from the E line, you follow the P line to get a read on whether the stock is expensive or cheap, relative to its earnings.

Overpriced growth stocks are doubly risky: If the earnings take a dive, the stock price heads for the bottom, and even if the earnings go up, the stock price may take a dive, or at best treadwater. When you way overpay for growth, the risk/reward ratiois highly unfavorable. The charts can help identify those situations.

Here are the charts of 11 companies (in no particular order) and the stories they tell:

Abbott Labs is a typical growth company, with the E on the riseand the P maneuvering around it. Every few years, as in 1987and 1991, investors get carried away with Abbott's prospectsand bid up the P, which puts a lot of distance between it andthe E. The best time to buy the stock is when the P comes backto the E, or drops below the E, as it did briefly in 1993. When the two lines converge, it means the company's growth rate is equal to its p/e ratioŠa good opportunity to invest in futuregrowth at a bargain price. Today, we see the P drifting awayfrom the E; Abbott is no longer the bargain it was two years ago, despite very good profits.

Walgreen is an excellent drug chain whose P rides above the E most of the time. This shows that investors are so confident of Walgreen's knack for making money, they're willing to pay a high price for future earnings growth.

The P drifted sideways in 1993 and '94. People who look onlyat stock prices might have thought something was wrong with thecompany. But the E kept rising, so people who paid attention to earnings knew the company was doing fine. The price simply got too high, as it does from time to time. It's moving in that direction again.

McDonald's is in the news; Warren Buffett is reportedly buyingshares. No doubt he's aware of the risk: The gap between McDonald'sP and its E hasn't been this wide since 1987, just before theOctober crash. Investors are counting on McDonald's to speedup its earnings by sending more and more Golden Arches abroad.If McDonald's doesn't accelerate the E, there's potential troubleahead for the P.

Johnson & Johnson was one of my recommendations at the Barron'sroundtable in January of 1994. I'd noticed the P had taken arare dip below the E, which, as usual, was on a profitable tack.You can see what's happened sinceŠthe P reversed field and hasshot from under $40 to over $90. Johnson & Johnson is still agreat growth company with strong future prospects (I own it),but a wide gap has opened up between the lines.

Wal-Mart investors have had an unshakable faith in the rapidadvance of the E, so until recently they paid a big premium forthe P. Hence, there's been a gap you could drive a fleet through.By 1992, the P had strayed further from the E than at any timein the company's history. For three years thereafter, the earningsrose by nearly 50 percent and the stock went nowhere. Imaginethe stock's fate if the earnings had dropped.

Recently, Wal-Mart's p/e gap has narrowed, making it less risky than it was in 1992. This hulking giant can't be expected tokeep up the fast growth it enjoyed in years past, but the stockis priced for slower growth. The current p/e ratio on expected1996 earnings is about equal to that of the average stock. IfWal-Mart's new supercenter stores are successful, it has a decentshot at a decade of respectable growth.

General Electric investors have always lacked faith in GE'sability to speed up the growth rate, so the P travels close tothe E and often drifts below it. This chart is telling us: "GE can't keep up with a Wal-Mart or a McDonald's." Nevertheless,GE makes steady progress, and the E has always been on the rise.Saddam Hussein gave us a buying opportunity a few years backwhen the P veered sharply south in the months before Desert Storm.

Emerson Electric, a leading producer of electric motors andother industrial products, has sailed through recessions withouta hitch: 38 consecutive years of rising E. You can see the pointwhere Wall Street finally recognized Emerson as a reliable fastgrowerŠin 1991, the P crossed above the E, and it's stayed there ever since.

As of this writing, Emerson sells for about $80 a share, but if the market had continued to perceive it as an unreliable slow grower, the stock might well be selling for $55 a share, a $25 difference on the same earnings. Instead of being an $18 billion company, Emerson would be a $12 billion company. That's how muchfaith in future growth can affect a shareholder's pocketbook.

Coca-Cola's chart from 1984 to 1989 looked like it belongedto General Electric, and from 1988 forward, it looked like Wal-Mart's.The flagship of the soft-drink business suddenly was put on thefast track, and Wall Street noticed. While the E accelerated,the P raced ahead of it, creating a dangerous gap. At the startof 1992, any chart reader could see the P was out of line andthe E needed time to catch up to it. The P went nowhere for twoand a half years, while the earnings continued apace. Lately,the P has jumped again, and the gap has widened. Investors arebetting once more that Coke will speed up the E.

Who knows how high the stock price will go? Maybe it will hit $100 or $120 a share and go from overpriced to grossly overpriced.Such an advance won't do long-term investors any good. Sooneror later, the P will come back to more sensible levels, becausewith Coke in more than 195 countries already, how can its E growthaccelerate fast enough to support the rising P?

Automatic Data Processing is an even more consistent growerthan CokeŠ34 years of double-digit earnings growth every quarter,and all it basically does is handle other companies' payrolls.You had a great chance to buy it in 1989 and again in 1990, whenthe P and the E converged, but since that time, optimistic investorshave bid up the P and widened the gap.

Philip Morris is another fast grower that Wall Street givesno respect. It's a chronically underpriced growth stock whoseP stays well below the E most of the time. Investors continuouslyworry that Philip Morris will lose billions in lawsuits broughtby smokers. Yet in spite of its underachieving P, the stock is up tenfold in ten years, thanks to the spectacular rise in theE. If Philip Morris maintains its earnings growth, investorswill make money no matter what Wall Street thinks. Without thethreat of lawsuits, the stock would be worth $120 on earningsstrength, as opposed to the $90 it fetches today.

Now, General Motors. Can you see why this chart doesn't fitwith the others? The E wobbles all over. It's the typical courseof a cyclical company, as unpredictable as a hurricane's path.From 1984 to 1989, GM's E was far above its P, yet the P neverrose to meet it because investors didn't believe the prosperitywould continue. They were right: From 1990 to 1992, the E felloff the chart. GM was losing billions. Today, the E has movedback to the top of the chart, but judging by the sluggish P,investors are doubting it will stay put. GM has cut costs and revamped its operations. There's a chance the E will continueto advance and GM will ride out the next recession in the black.If that happens, investors will probably value earnings morehighly in a subsequent recovery. It's a stock I own.

After saying so much about charts, I must issue the following disclaimer: I'm not a technical analyst, or a wiggle reader who makes predictions on the direction of the next wiggle. I usecharts to help me find value among growth companies I follow.

I'd be the last person to suggest using these charts to sell your growth companies every time they looked way overpriced.Instead of investing for the long term, you become a market timer.But if you've got an extra pile of money to invest, and you seethat your favorite growth company's P has far outdistanced itsE, you might want to hold off on buying the stock until it becomesmore reasonable. "Buy on strength," advisers may tell youŠbutthe charts show it's a lousy strategy.

Do-it-yourselfers can plot their own charts with the help of the National Association of Investors Corporation, an umbrella organization for more than 18,000 investment clubs. They evenhave the graph paper with properly aligned price and earningsscales. For details, call 810- 583-NAIC.

Peter Lynch writes Investor's Edge with John Rothchild, and is vice- chairman of Fidelity Management and Research. Their thirdbook, Learn to Earn, was recently published by Simon & Schuster.