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Tuesday, December 22, 2015

Mark Hulbert - Stocks are more overvalued now than at 2000 and 2007 peaks


Median NYSE stock’s current P/E and price/sales ratio sparks concern

CHAPEL HILL, N.C. (MarketWatch) — The stock market currently is even more overvalued than it was at the bull market peaks of both March 2000 and October 2007 — according to not just one, but two, valuation measures.

That at least is the message of an analysis released earlier this week by Ned Davis Research, the quantitative research firm. What caught my eye in the firm’s analysis was that, unlike virtually all others that conclude that stocks are overvalued, this one was not based on the so-called Shiller P/E — the cyclically-adjusted P/E ratio championed by Nobel laureate Robert Shiller of Yale University.

That’s noteworthy, since there would be nothing new in reporting that Shiller’s P/E shows stocks to be overvalued. That ratio has been giving this same message for several years now, and skeptics have found many ways of wriggling out from underneath its bearish implications.

With a Fed rate hike (possibly) around the corner, portfolio manager Chris Davis lists three favorite stocks and many reasons he thinks they can beat the market in coming years.

But Ned Davis’s latest report focuses on something different: the median stock’s price/earnings and price/sales ratios. The median stock, of course, is the one for which exactly half have higher ratios and half have lower. By focusing on the median, Davis’s findings are immune from the charge that they are being skewed by outliers — such as the terrible earnings among energy companies.

The chart at the top of this column summarizes what Davis found. Currently, according to his firm’s research, the median NYSE-listed stock has a price/earnings ratio of 25.6, when calculated based on trailing 12-month earnings. At the bull market peak in October 2007, for example, the comparable ratio was below 20; at the top of the Internet bubble in March 2000, it was even lower.

In fact, according to Davis, the price/earnings ratio currently for the median NYSE stock is the highest it’s ever been since his data series began in 1980 — except for the bear-market lows of October 2002 and March 2009, when earnings were depressed by recessions.
TimeNYSE Composite IndexJan 15Mar 15May 15Jul 15Sep 15Nov 15
A similar story is told by the price/sales ratio. The median S&P 500 SPX, +0.78% stock currently has a ratio of 2.16, according to Davis, versus 1.9 in October 2007 and even lower in March 2000. The median stocks’ price/sales ratio has never been higher than it’s been this year.

Davis acknowledges that low interest rates and low inflation may account for some of the current sky-high valuation ratios. “But inflation and interest rates have been low and falling since mid-2014, and note that the NYSE Composite is below where it was then, suggesting valuations are a headwind for stocks.”

To be sure, Davis isn’t turning outright bearish, since some of his shorter-term indicators are more positive.

But, he says, the valuation indicators are leading him to change his stance closer to neutral: “Median price/earnings and price/sales ratios higher than at the peaks in 2000 and 2007 are clearly a concern.”

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