BELIEVE IT OR NOT -- RECORD HIGH P/E RATIO

verfasst von leibovitz, 07.11.2001, 16:22

BELIEVE IT OR NOT -- RECORD HIGH P/E RATIO
Based upon S&P’s third quarter earnings estimate of 29.54 for the latest four quarters (three actual and one estimated), the
decline from a year ago in net income is a whopping 45%! (Note that this happened in a four-quarter period where real GDP rose
0.8% and nominal GDP rose 3.1%.) This would put earnings below any of the last seven years, and it would raise the P/E ratio at
the end of October to 35.9, an all-time record high as shown on chart S660 below. The mean for S&P 500 P/E ratios since 1926
is 15.2, so those who have argued that stocks are at fair value or undervalued have some explaining to do. (If they do it based upon
earnings estimates looking out a year or two, ask how they did on this year’s estimate or what the cost of security will be.) By the
end of this year, earnings will be lower yet.
So-called operating earnings are quite a bit higher ($41 estimate) but we think they misleadingly overstate profits. Actually
even reported earnings could be overstated due to the widespread use of stock options as compensation, then legally not showing the
options as an expense which, of course, everybody knows it is. Taking it a big step forward, the Levy Institute argues that in the last
15 years, companies took capital gains that averaged about 20% of profits. Most of these should have been taken out of (subtracted
from) operating earnings as unusual income gains since they were not part of their normal operations. Their implication is that
these capital gains were taken as a normal business income in reported earnings. Thus, they argue that reported earnings should
have been higher than operating earnings had companies not calculated operating earnings in such a misleading fashion.
Companies used all kinds of creative accounting and have focused almost solely on writing off any"unusual" expense but not
considered any write-off of"unusual" revenue or income. Thus, the quantity of earnings is a problem but so is the quality of
earnings.
I could just argue that stocks are"priced for perfection" like I did in early 2000 and then state the obvious, which is that, the
global outlook is not exactly perfect. But I don’t think that the whole story is bearish. Stocks nearly always sell at higher multiples
on depressed earnings than they do at peak earnings. Thus, to really use P/Es as a timing tool, one should always consider
"normalized earnings." For what it is worth, a business cycle is normally around five years, so a five-year average of earnings in
normal times could be considered"normalized earnings." Thus, I could probably live with a"normalized earnings" estimate of $41
for the S&P 500 earnings. Clients will have to put their own value on a multiple with the $41 in earnings but I can’t see anything
above a 20 P/E as being fair value or bargain valued. Thus, I see stocks as overvalued.
Despite all this, I still see the indicator evidence as mostly neutral. Selling rallies and buying big weakness would be my advice
as we wait for the indicator evidence to get more decisive.

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gesamter Thread:

• BELIEVE IT OR NOT -- RECORD HIGH P/E RATIO - leibovitz, 07.11.2001, 16:22
  • Nasdaq 100 hat bereits negatives P/E - mguder, 07.11.2001, 17:01
    • Re: Nasdaq 100 hat bereits negatives P/E - SchlauFuchs, 07.11.2001, 17:11
    • Re: Nasdaq 100 hat bereits negatives P/E - Crowley, 07.11.2001, 18:38
      • FLUCTIN von Eli Lilly ist auch gut ;-) Spass bei Seite... kann jeden - Ricoletto, 07.11.2001, 18:43
        • FLUCTIN ist der deutsche Markenname von PROZAC oT - Crowley, 07.11.2001, 19:16
          • Re: FLUCTIN ist der deutsche Markenname von PROZAC oT - Cujo, 07.11.2001, 19:57
      • Re: Nasdaq 100 hat bereits negatives P/E / @Crowley - JüKü, 07.11.2001, 21:21
        • Re: Nasdaq 100 hat bereits negatives P/E / @Crowley - Crowley, 07.11.2001, 21:59
      • Re: Nasdaq 100 hat bereits negatives P/E - mguder, 07.11.2001, 21:42
    • Untergang der Zivilisation wegen neg P/E Nasdaq-100? Versteh' ich nicht? Warum? - Josef, 07.11.2001, 21:55
      • Re: Untergang der Zivilisation wegen neg P/E Nasdaq-100? Versteh' ich nicht? Warum? - mguder, 07.11.2001, 22:02
        • Re: Untergang der Zivilisation wegen neg P/E Nasdaq-100? Versteh' ich nicht? Warum? - XERXES, 07.11.2001, 22:18
          • Re: Untergang der Zivilisation wegen neg P/E Nasdaq-100? Versteh' ich nicht? Warum? - dottore, 08.11.2001, 09:18
        • Vielen Dank fuer die schnelle Antwort. Vorschlag: Posting Deflationsanzeichen - Josef, 07.11.2001, 22:29
          • Re: Vielen Dank fuer die schnelle Antwort. Vorschlag: Posting Deflationsanzeichen - Euklid, 07.11.2001, 23:55
          • Deflation - mguder, 08.11.2001, 16:05