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A Change in Values

Newfangled valuation methods for Internet stocks are finding their way to 'old era' stocks.


predicting the long bond will sport a yield of 7.50% in 2000,

Byron Wien

, chief U.S. strategist at

Morgan Stanley Dean Witter

, grabbed the headlines. But I submit it was not the most important "call" from Wall Street's hallowed halls today.

That's not to knock Wien, who is certainly influential. But premonitions of trouble afoot from strategists at big Wall Street firms aren't exactly new, are they? Heck,

Barton Biggs

, Wien's cohort and Morgan's chief global strategist, could be the yardstick by which all other sourpussed strategists are measured.

What is new (or at least "newer") is that so-called traditional Wall Street firms are quietly embracing the so-called new era guidelines when it comes to valuing stocks. Perhaps it's a natural extension of their begrudging acceptance of the need to offer online trading.

The 1000 price target slapped on


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last week is the most glaring example, but not the most recent.

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Salomon Smith Barney




its "top pick" for 2000. In reaction, the stock climbed 4.4% to 114.

EMC isn't usually thought of as a "highflier" or a "momentum" play, but Salomon's call today comes after the stock rose 157% in 1999 and was trading at a price-to-earnings ratio of 76.9 times estimated 2000 earnings


today's move.

In a report announcing EMC as the top pick for the year, Salomon analyst John Dean blithely suggested the stock is undervalued relative to peers such as


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based on its


ratio (italics mine), which is forward P/E divided by forward-earnings-growth projections.

Using ratios such as price to growth or price to sales, or valuing companies vs. their peers (vs. their financials), are common practices for analyzing Internet stocks and others without longstanding track records (or earnings). The fact such measures are filtering up (or down, depending on your perspective) to more "traditional" names such as EMC is somewhat revolutionary.

"You have some big firms starting to join this whole euphoric-type atmosphere," said Charles Payne, president and chief analyst at

Wall Street Strategies

. "Some of these firms are saying, 'This is the new paradigm. We can't tell everybody how stupid they are while they continue to go to the bank.' "

Just a few short years ago, Payne mused Salomon would have "gone neutral" on EMC "solely on price" vs. today's environment, where higher prices beget higher prices and ever-more-creative analysis to justify the valuations.

(This column is not, in any way, intended as a negative comment on EMC. Many players believe EMC should be a "core" tech holding for long-term investors and rank it on par with


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Sun Microsystems

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and other tech bellwethers. Nor should this be construed as a condemnation of Dean, who could not be reached for comment.)

For one thing, Dean is not alone (proving nothing other than there's safety in numbers). Just today, Salomon's Alex Cena upped his price target on



to 200, even though the stock rose 141% in 1999 and trades at 47.8 times fiscal 2000 earnings projections. Elsewhere, Morgan Stanley Dean Witter initiated coverage of



-- which rose over 1000% last year and trades at 1787 times earnings estimates for 2001 (the first year it is expected to be profitable) -- with an outperform rating and 300 target.


Merrill Lynch

, considered the most conservative of the blue-blood firms, is getting into the act. Today, Merrill upped its target on

Best Buy

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to 100, based largely on the expectation investors will come to focus on the company's marketing relationship with Microsoft.

With a P/E of 30.2 times fiscal 2001 estimates, Best Buy may be "cheap" relative to some tech stocks, but recommending a stock based on its marketing alliances is hardly the stuff of




. (Salomon Brothers has an underwriting relationship with EMC but not Motorola. I could not determine with 100% certainty whether Morgan has done underwriting for DoubleClick or Merrill for Best Buy.)

As you might expect, Wall Street executives were not eager to talk about whether analysts are adopting new era valuations for "old era" stocks. A spokeswoman at Merrill said simply analysts are encouraged to operate independently within certain guidelines, notably, that "they're able to back up" their work with "fact vs. opinion."

But clearly, while market "generals" such as Wien stick to more time-honored rules, the analysts on the front line seem eager to try something new. Given the market's recent trends, it may indeed be a matter of survival.

Old-fashioned Wall Street firms are "finally aware of the game and they're playing the game," said one strategist, who requested anonymity. "Brokerage firms are in business to make money for themselves and their clients. If you use rigorous analytical discipline, you're out of this market."

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at .