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My Sunday Washington Post Business Section column is out. This morning, we look at whether stocks are cheap or expensive.

The print version had the full headline Are Stocks Cheap or Not? How to Tell. The conclusion is surprisngly middle of the road.

Here’s an excerpt from the column:

“To know whether stocks are cheap or pricey, we typically look at price-to-earnings ratio. Valuation is a tougher question than many folks realize. People forget that although we can pinpoint the price, we can only guess at future earnings. The past isn’t much help: It simply tells whether a market was pricey or cheap.

Valuation today is a function of price relative to future prospects, and that is an unknown. Sure, we have analysts’ consensus estimates as to future revenue, earnings and cash flows, but truth be told, these are at best an informed guess. A McKinsey study found that on average, analysts’ forecast were too bullish by nearly double. (The exception was at market lows, when they were too bearish). So keep that in mind whenever you think about valuations.”

Its a good exploration of various metrics.

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Source:
Are Stocks Cheap or Not? How to Tell
Barry Ritholtz
Washington Post, March 23, 2014
http://www.washingtonpost.com/business/how-to-know-whether-stocks-are-cheap-or-pricey/2014/03/20/ec105d54-ae2c-11e3-9627-c65021d6d572_story.html

Category: Apprenticed Investor, Investing, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “Are Stocks Cheap or Pricey?”

  1. Hi Barry,

    Bad embedded links.

  2. valpal says:

    Makes sense…If typical investors can overreact emotionally or irrationally, no reason analysts can’t do the same.

  3. Tom Tiedeman says:

    Price Earnings Ratios — current, looking back, and looking forward — have no correlation with stock market performance in the coming half year or so. Too bad.
    Here are a number of alternative measures:
    http://sixmonthstockmarketforecast.blogspot.com/p/blog-page.html

    The best valuation that I have seen is one from Morningstar. It almost never covered in the press:
    http://www.morningstar.com/market-valuation/market-fair-value-graph.aspx
    Click to the “max” time setting to get an historical perspective.

    • Subsequent performance is a different question.

      The question I asked was “Are stocks cheap or expensive?” NOT, “How are stocks going to do he next 6 months?”