Current Market Valuations and Momentum Stocks.

There are quite a few market valuations metrics that points to the market of being overvalued.

The Normal PE Gives us about 25% overvalued:
Current S&P 500 PE Ratio: 19.82 +0.01 (0.05%)
4:05 pm EST, Tue Jan 19
Mean: 15.57
Median: 14.61
Min: 5.31 (Dec 1917)
Max: 123.73 (May 2009)

The Case Schiller PE about 45% overvalued:
http://www.multpl.com/shiller-pe/
Current Shiller PE Ratio: 23.83 +0.01 (0.05%)
4:05 pm EST, Tue Jan 19
Mean: 16.65
Median: 16.02
Min: 4.78 (Dec 1920)
Max: 44.19 (Dec 1999)

Warren Buffett Indicator: 18.8% Overvalued.
http://www.businessinsider.com/buffett-indicator-better-but-…

So all the valuation metrics are showing that the stock market is overvalued.

What does this mean?
It means that a major correction may occur at any time. Mr. Market tends to overshoot so the correction may be much more than 20% and maybe as much as 540%. When this happens momentum stock got to be hit badly.

My take: Unless you are in a deeply valued stock this the time to get out of the market and wait in cash (IMHO).
This is not technical analysis this is from perspective of market valuation only.

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It drives me nuts that people keep talking about the market being overvalued in terms of P/E without recognizing the substantial changes in what is and is not required to be included in GAAP earnings which have significantly shifted the baseline. Nuts I tell you!

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How can the market go down 540%?

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It drives me nuts that people keep talking about the market being overvalued in terms of P/E without recognizing the substantial changes in what is and is not required to be included in GAAP earnings which have significantly shifted the baseline. Nuts I tell you!

Another thing to consider is that the S&P 500 may not be the most accurate measure of the broad market any longer. As noted by Chris, may individual stocks have gotten hammered over the past 6 months, much more so than what the S&P 500 has dropped by. But because of some market leaders, mainly the “FANG” (Facebook/Amazon/Netflix/Google) have done well it has skewed the index tremendously. In my mind we are already in a correction/bear market. Many names have their valuation tremendously suppressed.

Sincerely,
Charlie

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How can the market go down 540%?
With a typo it sure can!
I meant 40% of course.
Shuki

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It drives me nuts that people keep talking about the market being overvalued in terms of P/E without recognizing the substantial changes in what is and is not required to be included in GAAP earnings which have significantly shifted the baseline. Nuts I tell you!
Can you elaborate more?

Robert Schiller (Case Schiller PE) himself said that the market is overvalued. Is he crazy? Is he person that doesn’t know what he is talking about?

And you ignore the Case Schiller PE and the Buffett valuation index too?

Buffett valuation index got nothing to do with PE, its the market cap Whishire 5000 / USA GDP…

(Buffett doesn’t know a thing about value right?)

You really believe that this market is fairly valued?

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You really believe that this market is fairly valued?

Shuki,

You will drive yourself crazy by looking at the “market”. It is very nebulous, consisting of averages. Saul and people who use similar methods do not look at the market. They look at individual companies. Valuation techniques can be more easily applied to individual companies as the components that make up the market are always changing. For instance, the companies in a particular index is changing. The market includes companies that Saul would never invest in. For instance, the oil companies that are hemorrhaging cash and are loaded with debt are a drag on the market. People can be fooled by the averages. There are always bright spots in every situation and looking at only an averages will miss those. There are companies that have been growing earnings rapidly yet they are trading at low multiples for those growth rates. If you examine a company and you find a good reason why those earnings increases will slow then you may have an overvalued company. And if you only look at the market then you will miss those opportunities.

To take it a step future, the US economy is growing at 3+%. Someone might thing that a 3% return is pretty crappy and might conclude that investing in any US company is not a good investment. But we know that there are many companies that are growing revenue many times faster than 3%. We are trying to find those companies and if they are reasonably priced and if we think (after examining their business) that they will continue to grow, then we might invest. The occasional “market” hissy fit will not stop us but it may test our resolve. Through times like these we must remain focused on the business not the stock price.

Chris

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P/E may be the least important valuation measure. T has a point about changes in GAAP. But what decides effectiveness is results. A theoretically poor basketball team that wins a lot is still a good team.

Several valuation measures were mentioned a few posts ago. They are all valid , none are perfect, they need to be considered as a group,. But they all give the same results - stock prices were way too high and they are still not cheap. Historically. Because it is all to easy to find reasons why " It is different this time"

I prefer Tobin’s Q , which also shows over valuation.

Valuation is not a market timing tool since markets can stay over or undervalued for long periods. It is a very good tool for telling the likely return of holding stocks over the next 5 -10 years. And these are hard numbers, no interpretation or special talents needed to read the message.

I got a lot of criticism for suggesting that while Saul type stocks seem to out-perform in bullish conditions, they probably would under-perform in bearish conditions. That is not to say that they won’t bounce back after the present unpleasantness is over- if their business is good they probably will. But that “if” is a big one., a lot can change in a year or so.

I did buy a small starter position in Berkshire today . Even though the odds are it will get even cheaper…Mostly so I would not forget about it . Because I know they will still be around in 12 or 18 months.

OK so this post is mostly about valuation and a stock. Neither of which are " market timing"

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Several valuation measures were mentioned a few posts ago. They are all valid , none are perfect, they need to be considered as a group,. But they all give the same results - stock prices were way too high and they are still not cheap.

That statement sounds insightful given the current meltdown, but I just don’t see how “all” numbers say stock prices are too high…when you look at individual cases that have been pummeled.

So AAPL with a PE of 10 and 1YPEG of 0.24 says the price is still too high?

GILD with a PE of 7.5 and 1YPEG of 0.08 is too high?

AMBA, PE 10, 1YPEG 0.09 too high?

SWKS, PE 11, 1YPEG 0.24 too high?

SKX, PE 17.6, 1YPEG 0.25 too high?

I seem to recall Saul saying what a bargain SKX was with a 1YPEG of around 0.33 and PE over 20. I don’t think he was wrong in saying that then.

So, are those numbers really saying those prices are too high? If so, then someone needs to explain why those numbers now mean the opposite of what they did a few months back.

Yes, I only focused on PE and 1YPEG, but those have been presented on this board (and many other places) as being relevant. I don’t really rely on those numbers, but do look at them. Right now, they don’t seem to carry any weight at all because the market is in “fear everything” mode. What I wish I knew was how much of that fear should be taken seriously and how much is manufactured to make us all afraid. I can’t sort that out and applying any logic seems fruitless. Indeed oil prices have cratered, that is definitely real, but how does it affect how many shoes SKX will sell, how many phones AAPL will sell or how many HCV cures GILD will sell? China problems seem to be over-exaggerated. Notice how GDP came in just shy of 7% and immediately bears say that number can’t be trusted and it’s probably closer to 4%. Not saying I trust the Chinese government, but how do the people saying 4% know? I don’t trust them either.

Several companies have already reported good earnings, but “the market” doesn’t seem to care at all about that. All we hear is how awful everything is. I’ll be glad when everything is wonderful again (according to “the market”). Even if it doesn’t make more sense, it sure is more fun.

Steve

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Several companies have already reported good earnings, but “the market” doesn’t seem to care at all about that. All we hear is how awful everything is.

Hi Sage Wren, Nice post, And I see you were the winner of the 2015 Rule Breakers Challenge! Congratulations!
Saul

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Saul,

Thank you! So far this year I think I’m in last place in the challenge.

I was tempted to post a reply to your post about your 2015 results to say that mine ended up 75% after being up 120% at one point last year and then confess that was only my five picks for the challenge and unfortunately my real holdings didn’t fare nearly that well or nearly as well as yours. :wink:

Steve

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How can the market go down 540%?

How do we do it? Volume! Volume! Volume!

:wink:

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but because of some market leaders, mainly the “FANG” (Facebook/Amazon/Netflix/Google) have done well it has skewed the index tremendously

Yes! and that is a classic sign of trouble. It is called divergence. Very typically at the end of a bull run the “smart” money will start moving out of the smaller caps into the bigger, very liquid stocks. They believe that lets them dump faster when the music stops. The problem with divergence signals is they can sometimes take as long as 18 months to “come true”. In this case it was much faster.

As far as the “market” goes, IBD likes to maintain that 75% of a stock’s price change is due to the market. (Somewhat of a tautology as the direction of most of the stocks also determines the direction of the “market”, divergence aside)

When market is in a correction then wait for a “follow through day” to start getting back in (FTD= a big volume, 1.5%-2% move 3-8 days after a bottom). The volume and % move of the FTD is required to be high to “prove” that the big institutions are starting to put cash back in the market, thus supporting our investments. Theory: it is hard to fight the big boys, so use our smallness and flexibility to out maneuver them.

It got me to 80% cash in my 401K by late Dec and early Jan, but outside of that I decided to hold my individual stocks, which are getting crushed :wink:

Speaking of OT subjects…
Today may be looked upon by many as a successful test of the August lows. If we hold for a few days, the psychology may change and we may start looking for the FTD :wink:

Pete

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I want to again bring up a valuation metric from Graham. Given that he changed his approach over time and it has been a long time since this metric was used: he looked at the 10 year AA corporate bond rate. Invert this into a “p/e equivalent”. Shave it by 1/3 for a margin of safety.
Today the 10-year AA corporate is 2.94% which converts to a 34 p/e and a margin of safety p/e of 22.7.
I have put a big * on this over the last 5 or 6 years because of my uncertainty over how long these low rates would last. But here we are, 2016. My question is whether the Schiller and Buffet valuation metrics ought to be modified in this prolonged low interest rate environment. My opinion is that the interest rate environment makes a big difference.

KC

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Today may be looked upon by many as a successful test of the August low
Or as the left shoulder and head of a head and shoulders working toward full H&S pattern. Which usually is not s good sign.
But these formations are mostly in the eye of the be holder A book has been written about H& S as well as “double bottoms” and i will glance at it tomorrow. Quantifying them is tough,why not just look ate them?

Since these patterns are hard to read without seeing imaginary patterns. like figures in inkblots ,They aren’t a part of my system but I do pay some attention to them just as I do to valuation.

I try not to pay attention to wall street pundits searching for headlines.

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Yeah I don’t either man( pay attention to the noise )

Isn’t that why Buffet moved to Nebraska, to be as far away as possible from it.

Frank

I don’t think Buffet moved to Nebraska - I’m pretty sure he was born and raised in Omaha. He simply refused to move away from his home. BTW, if you’ve never been there, Omaha is a pretty neat city.

The more noise you can tune out the better. If you haven’t read the Nicolas Darvas story, its a very interesting of how powerful being somewhat distanced from the markets can be