Posts filed under “Valuation”
This morning in my Sunday Washington Post Business Section column, we look at the issue of how expensive U.S. stocks are. There are several ways to determine this, fraught with the potential for error.
If you want to determine how cheap or expensive the stock market is, I suggest three commandments to consider:
●Thou shalt consider a full assortment of all valuation metrics;
●Thou shalt not cherry-pick only those metrics that support your preferred outcome;
●Thou shalt focus on the very best measure of market valuation, according to academic research and data.
The column goes on to explain each of those factors in detail. Here’s an excerpt:
“Anyone can point to a single metric that shows stocks as either cheap or expensive.
Those who are bearish usually go for Trailing Price to Earnings ratio (17.1 P/E), which shows stocks as pricey, or the even more expensive Shiller’s Cyclically Adjusted PE, which show stocks as very pricey (26.8 CAPE).
Conversely, those who are bullish choose other metrics: They select price to free cash flow or price to normalized earnings to show markets as cheap. The Standard & Poor’s 500-stock index is valued at 22.3 times free cash flow — about 22 percent below its average reading from 1986 to 2014. Price to normalized earnings is at 18.6 times, or 2 percent less than its post-September 1987 average.”
Of course, the point is that you don’t pick the metric that supports your conclusion rather, you look at ALL the metrics in order to get a better sense of valuation.
And, looking at the metric with the vert best track record of indicating future returns is never a bad idea, either.
Many metrics can be used to value markets. Which should you trust?
Washington Post, March 8, 2015 2015
Emerging-Stock Bargain Seen in Commodity Users: Chart of the Day By David Wilson, Bloomberg The CHART OF THE DAY illustrates how Emerging-market stocks are becoming cheap enough relative to U.S. shares. Jack Ablin, chief investment officer at BMO Private Bank compared the price-to-sales ratios for the MSCI Emerging Markets Index, which tracks shares of companies…Read More
If you have been a regular reader of mine, you are probably familiar with several things about me: First, you know I have been a steadfast bull during the entire rise in the stock market. It isn’t that I am such a genius or especially lucky. I just would rather not guess when the bull…Read More
In our discussion of Mr. Market, we made passing reference yesterday to CAPE, Yale professor Robert Shiller’s 10-year cyclically adjusted price-earnings measure. This led to quite a conversation via a series of e-mails and Twitter posts from an assortment of analysts and asset managers. I received research from or by Cliff Asness, Michael Kitces, Mebane…Read More
I have a fairly long piece coming out looking at CAPE, but for those of you interested, here are the research and resources I used: Fixing the Shiller CAPE: Accounting, Dividends, and the Permanently High Plateau PHILOSOPHICAL ECONOMICS December 13, 2013 @Jesse_Livermore An Old Friend: The Stock Market’s Shiller P/E, Clifford S. Asness, Ph.D., AQR’s…Read More