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Posted by Jose Bailen on February 15, 2007, 7:03 pm
Value investment is defined as the style of choosing stocks that are
trading below their intrinsic value. On average, econometric tests
show that the best indicator of value of a portfolio is a high average
book-to-market price ratio (low P/B). Other indicators, such as a low
price/earnings ratio, have a weaker relationship with value. This
article: http://www.dfaus.com/library/articles/
is_there_value_btm_ratio/ provides a good survey of the empirical
literature in this area.
That said, an individual stock with a P/B of 5 and a P/E of 30 (for
instance) may have more value than a stock with a P/B of just 1 and a
P/E of just 10. It all depends on factors such as the future earnings
prospects of a company. An example: a stock with a P/E of 30, but with
stable earnings growth rates, which can be more or less accurately
projected at a rate of 20 percent a year during the next 10-yr period
has more value than a stock with a P/E of just 10 but with very risky
earnings prospects, which average zero growth during during the next
10-yr period (just do the exercise using http://www.zroundtable.com/
ZRT_files/Finance/scripts/calc_stock_earnings.htm).
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Posted by on March 19, 2007, 4:57 am
This article from the New York Times confirms my earlier comments.
http://www.nytimes.com/2007/03/18/business/yourmoney/18stra.html?ref=business
Beyond the Bubble, With Small-Cap Stocks
By MARK HULBERT
Published: March 18, 2007
"This picture of a highly bifurcated stock market is painted by data
from Ford Equity Research of San Diego, which tracks around 4,500
publicly traded companies in the United States. Among companies that
have been publicly traded for at least seven years, the firm reports
that 55 percent have higher price-to-earnings ratios today than they
did in March 2000. The bulk of these pricier issues, however, are in
the smaller-cap sectors. Among the very largest companies, the average
P/E ratio is now just a third of what it was seven years ago."
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Posted by Elle on March 19, 2007, 5:44 pm
> http://www.nytimes.com/2007/03/18/business/yourmoney/18stra.html?ref=business
> Beyond the Bubble, With Small-Cap Stocks
> By MARK HULBERT
> Published: March 18, 2007
>
> "This picture of a highly bifurcated stock market is
> painted by data
> from Ford Equity Research of San Diego, which tracks
> around 4,500
> publicly traded companies in the United States. Among
> companies that
> have been publicly traded for at least seven years, the
> firm reports
> that 55 percent have higher price-to-earnings ratios today
> than they
> did in March 2000. The bulk of these pricier issues,
> however, are in
> the smaller-cap sectors. Among the very largest companies,
> the average
> P/E ratio is now just a third of what it was seven years
> ago."
Little clarification:
That last sentence is a little loaded, it seems to me. I was
hoping the article as a whole did not seem to suggest that
large companies are currently a "great buy." Unfortunately,
it does tend to do so. So one sees
"According to Standard & Poor's, for example, the P/E ratio
of the S& P 500 currently stands at 17, based on trailing
12-month operating earnings. The comparable ratio at the end
of March 2000 was 31.1, almost double the current level."
So an S&P 500 index fund is a real bargain now, if P/E is
one's main criterion?
Not necessarily.
Shiller's data shows the average P/E to be 14.6 for the
period from 1871-2003. Since WWII, it's still averaged about
15.
I would not say, explicitly or implicitly, that the S&P 500
is a good buy right now. It's not bad, maybe, but relative
to historical valuations, it's not impressive. go back to
1988 or even 1995, when its P/E was close to 11 and 14,
respectively, and then I might start suggesting it's a good
buy.
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Posted by Jose Bailen on March 20, 2007, 11:56 am
On Mar 19, 9:57 am, beliav...@aol.com wrote:
> This article from the New York Times confirms my earlier comments.
> http://www.nytimes.com/2007/03/18/business/yourmoney/18stra.html?ref=...
> Beyond the Bubble, With Small-Cap Stocks
> By MARK HULBERT
> Published: March 18, 2007
> "This picture of a highly bifurcated stock market is painted by data
> from Ford Equity Research of San Diego, which tracks around 4,500
> publicly traded companies in the United States. Among companies that
> have been publicly traded for at least seven years, the firm reports
> that 55 percent have higher price-to-earnings ratios today than they
> did in March 2000. The bulk of these pricier issues, however, are in
> the smaller-cap sectors. Among the very largest companies, the average
> P/E ratio is now just a third of what it was seven years ago."
The information in this article is not correct. As of February 28, the
average trailing P/E of the broad market was 16.24 (and given the
declines in the last 3 weeks, it is almost certain that it is lower
than 16 as of right now):
http://www.globalindices.standardandpoors.com/sandp/index.jsp?pg=/apps/fundamental/fundamental.jsp&rp=returns).
In any case, the average P/E is not the most relevant indicator of how
much a certain category of stocks (small or large caps) are
over(under)valued, but the average P/B (see article at the DFA library
cited above). The average P/B of large caps is still significantly
larger than the P/B of small caps.
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Posted by on March 19, 2007, 8:25 am
On Feb 14, 2:54 pm, beliav...@aol.com wrote:
> James Altucher just wrote at realmoney.com (a pay site) that "many
> growth indices (Value Line, in particular) actually have lower P/E
> ratios than their value counterparts."
>
>
> I think that the current compression in earnings multiples between
> growth and value stocks means that the value premium (the expected
> return differential of value over growth stocks) is small right now.
> In 2000 there was a much bigger difference in earnings multiples
> between value and growth stocks, and with some hindsight, one can also
> that the value premium was also much higher.
>
> I wonder how closely the value and growth ETFs and index mutual funds
> conform to the definitions of value used by academics who have studied
> the "value premium".
The academic literature is all about price to book (or rather the
inverse book to market value).
It sounds like this is one of those cases where 'value' and 'growth'
have become marketing terms. It's no longer transparent to the
outside investor what is a 'value' and a 'growth' stock.
Many of these companies have prodigious free cash flow relative to
their capitalisation. My own observation is that large cap 'growth'
stocks are as cheap as they have ever been relative to the market
(Barton Biggs says he cannot find evidence they were ever cheaper).
However as you highlight, a typical 'growth' stock like GE, WalMart or
Pfizer, is now rated in PE terms as if it were a value stock.
The managements of these companies have a lot of scope to add value
simply by financial engineering: buying back stock, selling operations
to private equity, spinning out subsidiaries. Even if organic growth
remains sluggish.
Biggs also points out that these stocks are a good hedge against
global inflation, given the international diversification of their
operations.
======================================= MODERATOR'S COMMENT:
Posters to this thread should relate comments to general financial planning.
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