Course 210: Operating Risk versus Price Risk
Low Operating Risk and High Price Risk
In this course
1 Introduction
2 Low Operating Risk and High Price Risk
3 High Operating Risk and Low Price Risk
4 Low Operating Risk and Low Price Risk
5 High Operating Risk and High Price Risk

Most of the leading stocks in today's market fit into this box. These are stocks like Cisco Systems CSCO, Wal-Mart WMT, and Johnson & Johnson JNJ--in other words, companies that have advantages, such as leading market position, brand-name franchises, and superior profitability, that allow them to post reliable earnings and growth year in and year out, quarter after quarter. Smaller or less well-known companies with good managements or strong market niches can also end up here. These companies--though they occasionally post lower-than-expected growth or weak earnings--have delivered over the long haul. And the market has noticed. For example, as of November 1999, Clorox CLX commanded 47 times its trailing earnings, a P/E ratio 50% higher than its average P/E over the past five years. The market raised the premium on Clorox's future earnings in large part because the company has been so reliable in the past. If the companies in this group don't meet or exceed the market's high expectations, their stocks could be in for a long period of subpar returns until earnings catch up with the prices. And any glitch in earnings--and every company has glitches, no matter how steady it is overall--can send these stocks into a tailspin.

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