Mike Santoli disusses valuation in this weeks Barron’s:

“With those earnings coming, the question is whether the market has already paid for good results in returning to the upper end of its 2011 range. That’s another way of asking how stocks are valued here. The answer probably is fairly at best, and thus the market has at least put a generous down payment on imminent earnings.

Sure, the S&P 500 multiple on the next 12 months’ forecast earnings is below 13, thus seemingly cheap. Yet the biggest 30 mega-cap stocks are so inexpensive and scorned that the other 470 together trade right at their long-term average, notes Morgan Stanley strategist Adam Parker. And Ned Davis Research notes that the median stock has a trailing multiple above 18, above the 42-year median and “neutral at best.” (emphasis added)

Santoli notes the positive: Fed money is still free, corporate deal-making is “percolating” and investors are not yet excessively sanguine (i.e., too bullish).

But the fact that “Traders have built up calluses” to this year’s bad economic news is a negative, not a positive in my book. It means they are ignoring risk and potential downside. And while stocks ain’t terribly pricey, they ain’t cheap either. Have a look at Jim Bianco’s long term dividend chart; its more supportive of a cyclical rather than secular rally.


Dividend Yields Back to 1970

Category: Dividends, Valuation

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2 Responses to “QOTD: Valuation Driven by MegaCaps”

  1. RW says:

    Saying some stocks remain undervalued is not the same as saying they are inexpensive: The megacaps might lose less in a downturn but …

    What kills me is that Santoli and just about everyone else on the planet can see that money is free in US right now — actually better than free since real interest rates are negative so people are literally renting safety from the government — and the talk is still about the damned deficit rather than spending that free money hand-over-fist on infrastructure and other long-term, solid-multiple items and put some folks back to work.

    WRT resistance to bad news: That can help an investor stay the course but, in the aggregate, it does tend to underprice risk which simultaneously depresses returns and increases the chance of greater loss.

    Thinking back over past posts it seems clear that bailing out bond holders (to say nothing of equity holders and executive officers) when companies fail can only magnify that effect.

    Jared Bernstein at http://jaredbernsteinblog.com/the-bair-facts/ comments that “…if you want a two-word explanation of the monster that caused the Great Depression, my choice would be precisely that: underpriced risk.”

  2. derekce says:

    Bernanke in prepared testimony to Congress is revealing the Fed has plans for some more stimulus if needed, let’s see, that thing about markets being on their own lasted about 8 trading sessions. The Fed’s new unofficial mandate is to take care of the stock market.