Posts filed under “Valuation”
Earlier this month, we looked at the question of whether Stocks were Cheap or Expensive. That was a follow up to our glance at how much Earnings and Equities had rallied off the 2009 lows.
The problem is the many ways we can define earnings-per-share. Do we use analysts’ forward earnings estimates? Trailing 12 months reported earnings? GAAP? Operating earnings? Blame the accountant industry for lacking sufficient spine to create a formal, uniform consensus on exactly how we should be defining earnings-per-share.
Which earnings type we use is only the first issue we run into. The next concern is our data set. For example, the Merrill Lynch analysis look at 15 earnings measures, but used data that only went back as far as 1960. Yale University professor Bob Shiller’s database goes all the way back to 1871.
Choosing which data set to work with may create a different outcome. Merrill shows stock prices between moderately undervalued and fairly priced. Shiller shows equities as modestly over-valued. Note the choice we make when selecting data sets can have a very significant impact on the final numbers.
The reality is far more nuanced. We do not know if equities are either over or under valued, because we have no idea what future earnings are going to be. The debate about valuations often turns on which group’s forecast is going to be correct: Expansion or contraction. (We shall ignore the extremeists on both ends of the scale, as they are annoying little twerps who are almost never correct).
Consider how earnings might change in the near future: If the economy were to accelerate (Sequester ends? China improves? Europe recovers?) than earnings could increase significantly, thereby making stocks “suddenly” look cheap. The opposite of this is a US recession, where earnings fall 20-30%, making stocks appear pricey and due for a more significant correction than the 10-19% blips we have plowed through the past 5 years.
Perhaps a better answer to the question “Are stocks cheap or pricey?” is It depends upon what happens in the future.
It is a deeply unsatisfying answer to most people. That is mostly because of its characteristic of being a) true, and b) recognizing the inherent unknowable future as such, and therefor frustrating to those investors who cling to the illusion of clarity.
The Flawed Fed Valuation Model (February 5th, 2008)
Why Using P/E Ratios Can Be Misleading (March 21st, 2012)
Earnings and Equities had rallied off the 2009 lows. (July 22nd, 2013)
Stocks were Cheap or Expensive. (August 9th, 2013)
Price-to-Earnings Ratios Aren’t Always What They Seem
P/E Calculations Based on Differing Views of Earnings Paint Competing Pictures of the Market
WSJ,August 16, 2013
Click to enlarge Source: BofA Merrill Lynch US Equity & US Quant Strategy Merrill Lynch’s quant team looked at 15 metrics* that measure equity valuation (above). Their conclusion? Stocks are not overvalued; indeed, by most metrics, they are fairly valued. Key bullet points: • S&P 500 has been playing catch up to other…Read More
click for larger graphic Source: Merrill Lynch Research We interrupt the upcoming economic apocalypse and market collapse for this surprising message. Earnings are being revised higher, as are Revenues as well. Merrill Lynch, who tracks these sorts of things, notes that the latest revised expectations for Q2 are “1.3% higher than they were…Read More
Readying for Financial Bubbles to Burst By Andy Xie Caixin 07.29.2013 Small troubles regarding trust products and the property market will be worth enduring if major economic gains can be made Some financial accidents, e.g., trust products defaulting, may occur in the coming months. Their impact on the real economy will be limited….Read More
S&P500 Earnings, Quarterly versus Price (Q1 2009- Present) Click to enlarge Source: Bloomberg Data S&P500 Earnings, Trailing Year versus Price (1990 – Present) Source: Dan Greenhaus, BTIG Following last week’s discussion on narratives, I want to direct your attention to the charts above. One shows the quarterly recovery in earnings and prices since…Read More
Click to enlarge Source: Bloomberg Interesting chart form Dave Wilson showing how elusive the U.S. housing market’s rebound has been for the Homebuilders. Existing single-family homes sold at about the same pace in May as they did in January 2000, according to data compiled by the National Association of Realtors. New home sales…Read More
Click to enlarge I have to admit: I have never seen this ratio before. Standard & Poor’s 500 Index to profits at all U.S. companies. Its a price to earnings ratio of the main US stock market against ALL US earnings. According to this little used, odd ratio, Stocks are much cheaper after…Read More
Several comments in yesterday morning’s post sent me back to GMO’s archive to pull some of Ben Inker’s work. You should read yesterday morn’s commentary (here), than come back and read Inker. In particular, his piece Explaining Equity Returns. The five takeaways are as follows: 1) GDP growth and stock market returns do not have…Read More