Market warms up, bargains still abound
Posted on April 20, 2009 by Richard Beddard
Filed Under Companies, Investing, Markets |
In practice:
‘Bounce’ still insignificant
As promised on Wednesday, from now on Monday’s a data rich day. First, off the market, and the bad news: It’s warmed up a tiny bit since I reported that the recent stock market ‘bounce’ was insignificant.
By my calculation, the long-term price earnings ratio of the stock market is up to ten. In other words, people are prepared to pay more for their share of corporate profits than a month or so ago.
Does such optimism, like many people hope, mark the beginning of the turnaround?
I hope not. While it’s encouraging to experience nascent recoveries in companies I’ve bought, or written about, I’d like more time to pick companies at current prices.
As James Montier says in a research note published today:
As the markets rise so the scale of bottom-up deep value opportunities decreases.
Which is another way of saying there are fewer bargains around.
By his calculation, European and UK stockmarket PEs are about eleven. The US has recovered much more strongly and the implied return of about 6-7% for a stockmarket valued at 16 times long-term earnings means US shares are no longer cheap.
The point of valuing the stockmarket rather than obsessing about day-to-day movements in price is that it shields the investor from the psychological rollercoaster of what’s going to happen next and gives her confidence to buy when it’s cheap and sell when it’s expensive instead of buying when everyone else is, and selling when they are too.
Fortunately, a market PE of ten or eleven is still cheap (it implies a return of 10% or thereabouts), so there are still plenty of financially sound companies at cheap prices.
Steve at Sharelockholmes.com has added the ten year price earnings ratio to his screening software, and the ratio of cash flow to earnings per share averaged over five and ten years.
Since the former is my preferred valuation ratio, and the latter a quick guide to earnings quality, I think it makes the site even more useful.
To celebrate, here’s a list of companies with ten-year PEs below sixteen, that own more than twice what they owe and have reported full year results since the beginning of last December.
I’ve ordered them so that the cheapest companies with the strongest finances (by these measures) are at the top:
I haven’t checked these numbers, but I will for any company I highlight in future blog posts.
Of the companies in the list, Aga, Greggs, Laird, Bovis, Molins, Spirent, Microgen, and Millennium and Copthorne have already published annual reports making them prime candidates for investigation.
In theory:
Singing the bear market blues
Barry Ritholz’s The Big Picture hosts a bear market Video-o-rama including ‘Dow Jones’ from the album ‘Going out of Business’ by Downsize and an interview with John Bogle, ceo of Vanguard. No surprise, the old advocate of index funds blames money managers and analysts for not scrutinising banks. Hedge fund manager Hugh Hendry wants to short money managers, like him, because the good times are over.
Nassim Taleb says we want the next version of capitalism to be as far away as possible from the “Madoff model”. Private equity is too close to Madoff, he says, and the stockmarket has some “mild Ponzi” characteristics. Capitalism 2.0 needs a better design.
Anatole Kaletsky exhorts the government to “carry on borrowing”. Most of the budget deficit is because of the collapse in growth, he says, and the drop in tax revenues from the City. A debt-fuelled recovery would wipe out the debt we’re worried about.
Cartoonist Tom Toles sums up the state of economic forecasting.
Felix Salmon says Europeans are way behind American economics and finance bloggers, but at least “the Brits tend to have a vague idea of what a blog is.” He can’t imagine a vibrant German blogosphere.
Board members at Dawson International (DWSN) oppose a major shareholder’s attempt to replace its chairman, Mike Hartley. With its F_Score of eight, the cashmere business is a potential turnaround situation.
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2 Responses to “Market warms up, bargains still abound”
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Great blog!!
i will check most days now.
I just hope your data is accurate, finger crossed!
H
[...] Last week the stockmarket finished with a flourish, but in valuation terms, it’s still on a long-term price earnings ratio of ten (i.e. cheap, see my comment last week for an explanation): [...]