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Are Stocks cheap and what should I do about it? November 11, 2008

Posted by shaferfinancial in Uncategorized.
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World-wide stocks are at their lowest values since the 1970’s.  We judge this by looking at trailing price-to-earnings ratio (p/e).  With the last sell-off the trailing p/e ratio has gone under 10 for the global stock market.  The average p/e in the 1970s, a decade generally thought of as abnormally low stock prices was 11.4.  Here in the US we have a slightly higher p/e of 11.  So are stocks cheap?  Well, yes and no.  There are some stocks that are definitely cheap compared to their intrinsic value, while others are valued lower because of fundamental profit problems.

In short, this is not the time to guess or to buy index funds which just mimic the market.  This is the time to do fundamental analysis, looking for companies that have a long history of profitability, reasonable amount of debt, solid products that are still being purchased, etc.  It is not a time to take a flier on new companies, companies that products have fallen out of favor (GM, Ford, Corning), or that are carrying too much debt.  Finding companies that pay good dividends and have good fundamentals is also a great strategy.  In Europe, for example, average dividend payout is 5.5%.

If you are prepared, and understand fundamental analysis, this is the greatest time to buy stocks in a generation.  Joe Kennedy once opined that when his shoeshine boy was giving him stock tips, it was time to get out of the market, and he did in 1928 before the crash.  The inverse, as Warren Buffett has pointed out, is that when everyone is fearful it is the time to smartly buy stocks.  I can  safely say that everyone is fearful now!

spectators

   Don’t be a spectator, waiting for the car wreck.  Don’t miss out of the opportunity of a lifetime.

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Comments»

1. Phil - November 12, 2008

The S&P P/E ratio for 2009 is currently 18.37, based on the current price of 891.32 and the reported earnings estimates for 2009 from S&P, which is 48.52 per share. You can check the current P/E ratio here: http://stocks.daytodaydata.net/SP-500-PE-Ratio.aspx

Earnings (both actual and estimates) have been dropping over the past year, and there’s little reason why they will rise any time soon, because both consumers and businesses have been cutting their spending. This will reduce earnings, and as long as demand for stocks remains either constant of falls, the P/E ratio will fall from the current level of around 18.

2. shaferfinancial - November 12, 2008

Thanks Phil,

That is a great calculator site! I sure my readers will find it useful. The operating earnings per share is 12.86 for the last 4 reported quarters for the S & P 500. I reported numbers for the entire stock market as reported in the Wall Street Journal. The point I was so inartfully making is that p/e ratios are important to watch, but tell us nothing about whether to invest in a particular company. And p/e ratios for an index, like the S & P 500, should not be used as an investment guide to when to buy or when to sell. They can tell us about the value of a particular company versus its operating earnings. Thanks for commenting and giving us that great link.


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