http://www.bloomberg.com/news/2011-06-19/stocks-cheapest-in-two-decades-as-s-p-500-falls-with-earnings-climbing-18-.html For the second time since the bull market began, profits are surging and stocks are falling. Standard & Poor’s 500 Index companies will earn 18 percent more this year than in 2010, according to the average estimate of more than 9,000 analysts compiled by Bloomberg. Higher profits haven’t stopped the gauge from falling 6.8 percent since April 29, pushing valuations to the cheapest levels in 26 years. Even if companies posted no growth, price-earnings ratios would be lower than on 96 percent of days in the past two decades. Losses since April have pushed the price of the S&P 500 to 14.5 times the past year’s earnings, compared with the average of 20.5 since June 1991, according to Bloomberg data. The gauge is valued at 8.7 times cash flow, cheaper than in 81 percent of occasions since 1998. The gauge is priced at 2.1 times book value, or assets minus liabilities, lower than it has traded 90 percent of the time since 1995.
Trader, I’m the first to enjoy a sale on stocks, but remember that it appears that article is based on fwd p/e. If the market no longer has rosy expectations for 2H2011, they may be pricing that in, and stocks may not really be that dramatically cheap when judged by what they actually earn in 2011.
Looking at PE on March 9th, '09 stocks looked extremely expensive. Buying then worked out ok. Completely asinine metric.
Where is a good place to find historical P/E for the market?
http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l-- Login required. It’s free. Download “Index Earnings” file Or Shiller’s data at http://www.econ.yale.edu/~shiller/data.htm
yep the tricky part is forward earnings
Don’t forget that low P can also mean high risk ahead. Even with regular forward earnings, this doesn’t look like a low-risk environment here.
Thanks recycler. I don’t trust forward anything numbers and wouldnt put an ounce of faith in them. Whatever an ounce of faith may be…
I’ve always had trouble with forward PE ratios myself. You never really know what’s gone into generating the forward E. I often prefer to use trailing PE ratios discounted by a factor representing what I think a reasonable growth estimate for E would be in the current environment. I don’t have a full methodology, but I think some kind of cyclically adjusted earnings growth figure makes the most sense. Of course, even trailing PE is subject to some adjustments, but the scope for wild assumptions is substantially less. And a fair PE is known to change throughout the business cycle. It ought to be higher at the trough of a cycle, because near term earnings will improve faster than average and that growth will face less of a discount because it is coming in soon, and lower at the height of a cycle, because earnings will drop off faster than usual in the next recession. Empirically, PEs tend to be high at the peak, and low at the troughs, but that doesn’t mean the justified PEs should behave that way.
14.5 is only cheap when 20.5 = fair value May be 20.5 is grossly overvalued and 14.5 is the true value
Dude_CFA Wrote: ------------------------------------------------------- > Thanks recycler. > > I don’t trust forward anything numbers and wouldnt > put an ounce of faith in them. Whatever an ounce > of faith may be… McKinnesy did an study on forward earning here: http://www.mckinseyquarterly.com/Corporate_Finance/Equity_analysts_Still_too_bullish_2565#1 . There conclusion is that estimates are generally too optimistic. However, numerous blogs have criticized the study (one example: http://econintersect.com/b2evolution/blog3.php/2011/04/27/profiting-from-forward-earnings-estimates). Citing that for periods greater than 12 month earning estimates are usually wrong but reasonably accurate for the next four quarters.
ZeroBonus Wrote: ------------------------------------------------------- > 14.5 is only cheap when 20.5 = fair value > > May be 20.5 is grossly overvalued and 14.5 is the > true value 14.5 is cheap relative to a lot of other risky assets. This is 7% (plus ~2% div).
aren’t you double counting the dividend? it comes from earnings
florinpop Wrote: ------------------------------------------------------- > aren’t you double counting the dividend? it comes > from earnings Yeah, that’s what I was thinking too.
florinpop Wrote: ------------------------------------------------------- > aren’t you double counting the dividend? it comes > from earnings huh? are you saying EPS contains the dividend?
justin88 Wrote: ------------------------------------------------------- > florinpop Wrote: > -------------------------------------------------- > ----- > > aren’t you double counting the dividend? it > comes > > from earnings > > huh? are you saying EPS contains the dividend? Yikes. Yes the dividend comes out of the earnings of the company. Say the S&P 500 earns $100 this year, they will pay out about maybe $25 or so in dividends. You do not get a free dividend on top of earnings growth.
We’re either talking about a good entry point or a value trap. Last four quarters earnings plus dividends for s&p comes to $100.08. Its semantics but I like to look at earnings yield. Same thing, but I like to think in terms of my return yield. At price of about 1287, trailing earnings yield is about 7.8%. Compared to most other risk assets, thats pretty good. Agreed, forward earnings are unknown and could certainly be lower than trailing but I’m longer-term so it looks like a good entry point. This is why you have a diversified asset mix. If it happens that earnings fall and equities drop, then bonds (and dare I say, real estate) will outperform. Reallocate funds to take advantage of new-improved valuation of equities.
I’ve heard the argument a lot recently that margins are mean-reverting and they will come down. What is going to cause them to mean revert though? Typically when I think of margins going down it is because costs are going up or competition is increasing causing lower prices. Costs are unlikely to go up with 9% unemployment and the largest cost to employers being labor. Almost by definition, if competition is increasing then it seems to me there must be a number of new companies starting up to move into the most profitable industries, which would be good for employment and economic growth, thus growing company’s top lines even as margins come down a bit. So that is almost a win/win situation from that perspective. Either companies can stay profitable by squeezing the low growth economy or they can earn more overall as the economy expands. I’d rather have my money parked with an entity that has at least some chance of passing along the costs of inflation over a long period of time.
Dwight Wrote: ------------------------------------------------------- > Costs are unlikely to go up with 9% unemployment > and the largest cost to employers being labor. Except all those pesky input costs. Commodities are down off their peak, but they’re still high and I’m betting they’ll trend upwards. Release oil from the strategic reserves, drive down price of gas, launch QE3, continue destroying the dollar, etc…
Sweep the Leg Wrote: ------------------------------------------------------- > Dwight Wrote: > -------------------------------------------------- > ----- > > Costs are unlikely to go up with 9% > unemployment > > and the largest cost to employers being labor. > > Except all those pesky input costs. Commodities > are down off their peak, but they’re still high > and I’m betting they’ll trend upwards. > > Release oil from the strategic reserves, drive > down price of gas, launch QE3, continue destroying > the dollar, etc… Commodity costs are significant, but not destructive to margins considering we are predominantly a service economy. If your theory is true, why is it that with all the 100% increases in commodity prices over the past year or so margins are still at all time highs? Would you not think the margins would have already been impacted by the things you just listed? Companies are generally fairly effective at passing along costs. People are still going to buy MCD hamburgers even if the price of beef goes up because it is still going to be one of the cheapest relative meal alternatives. Coca Cola has passed on cost increases and maintained margins for 60 years.