18, 2002; McDep Ratio Hinted at Power Stock Collapse
months after our first application of the McDep Ratio to power stocks we find
that the valuation has worked surprisingly well. That thought was discussed in our recent Stock Idea changing
the rating on American Electric Power to Neutral from Buy.
Here we present the results in a way that makes the point more
dramatically (see Chart). The
correlation of high McDep Ratio with subsequent stock price change is almost
perfect. In fact it is better in
this case than in any we can recall.
be more sophisticated we should display unlevered appreciation/depreciation
because the McDep Ratio is a measure of unlevered valuation.
The refinement seems hardly worth the effort in this case, but it might
help explain why lower-debt DUK deviates slightly from the pattern.
this all just academic hindsight? There
may be some, but we did have an official sell recommendation on the second stock
from the left. More important is
the question for the future. Are
today's high McDep Ratio stocks anywhere near as vulnerable as the power stocks
proved to be?