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New versus Old: Cash is King (Friday, July 28, 2000)

Cash is King for both old and new stocks. The rather pedestrian PE ratios for Blue Chips such as General Motors (GM), Philip Morris (MO), JP Morgan (JPM) among many are relatively small when compared to Yahoo (YHOO), Cisco (CSCO), and others.

Why the discrepancy? It centers on growth prospects, earnings expectations and viability. Viability depends on cashflow and cash reserves. The older companies generally have large cash holdings to weather economic storms. New companies need cash to get quickly established as a dominant force or else get relegated to the pile of also-rans or bankrupts.

Cash is the financial lifeblood of an organization. Old economy companies essentially constrain their growth because of their relatively high and "stable" cash reserves. On the other hand, upstarts and new economy companies, tend to require higher cash outlays to get them aloft. If they stay there - and there is only room for a select few - then the new economy stocks have leveraged the cash. Due to that performance, those companies are rewarded with high PE multiples.

Burn rates are important for both groups but new economy stocks are compelled to flourish quickly or perish.

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