May 7, 2014

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VALUATION WATCH: Overvalued stocks now make up 60.99% of our stocks assigned a valuation and 23.14% of those equities are calculated to be overvalued by 20% or more. Fourteen sectors are calculated to be overvalued--six by double digits.

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Valuations Remain Elevated But "Normal"

ValuEngine tracks more than 7000 US equities, ADRs, and foreign stock which trade on US exchanges as well as @1000 Canadian equities. When EPS estimates are available for a given equity, our model calculates a level of mispricing or valuation percentage for that equity based on earnings estimates and what the stock should be worth if the market were totally rational and efficient--an academic exercise to be sure, but one which allows for useful comparisons between equities, sectors, and industries. Using our Valuation Model, we can currently assign a VE valuation calculation to more than 2800 stocks in our US Universe.

We combine all of the equities with a valuation calculation to track market valuation figures and use them as a metric for making calls about the overall state of the market. Two factors can lower these figures-- a market pullback, or a significant rise in EPS estimates. Vice-versa, a significant rally or reduction in EPS can raise the figure. Whenever we see overvaluation levels in excess of @ 65% for the overall universe and/or 27% for the overvalued by 20% or more categories, we issue a valuation warning.

We now calculate that 60.99% of stocks are overvalued and 23.14% of those stocks are overvalued by 20% or more. These figures have been fluctuating with increasing volatility, but have pretty much been pinned in this range for much of the past few months. We did our last valuation study on February 26th, and at that time we were within the same narrow range. As was the case then, these figures are down significantly from where they were for much of 2014.

As is always the case with this unprecedented rally, the market remains beholden to Janet Yellen and the Fed's rate raising schedule. Good news for the economy may paradoxically be bad bad for equities under these conditions. Bad news may provide a mini boom.

Despite recent poor GDP figures, we still find an improving labor situation which should finally bolster the recovery. We have also seen a remarkable recovery in the oil markets as US producers have reacted to Saudi attempts to crush them via low prices with agility and speed. That was bad news for speculators counting on low oil prices, but could be more beneficial to employment in places like Pennsylvania, Ohio, Texas, Oklahoma, etc. The quick reduction in drilling activities hurt workers and local economies, but a price recovery will mean a faster return for that industry.

We still find it more likely that the Fed will focus on employment rather than inflation (although that remains low as well) as it sets its rate increase schedule, and thus believe that equities may still remain the only game in town for a bit longer than many expected even a few months ago. Of course, the long hard winter for many areas of the US is now over. That brings to the forefront the long-held trader's maxim of "Sell in May and Go Away." Will that hold sway this year? Stay tuned.

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The chart below tracks the valuation metrics from January 2015. It shows levels in excess of 40%.

This chart shows overall universe over valuation in excess of 40% vs the S&P 500 from January 2014

This chart shows overall universe under and over valuation in excess of 40% vs the S&P 500 from March 2007*

*NOTE: Time Scale Compressed Prior to 2011.

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The ValuEngine View Newsletter is the product of a sophisticated stock valuation model that was first developed by ValuEngine's academic research team. It utilizes a three factor approach: fundamental variables such as a company's trailing 12-month Earnings-Per-Share (EPS), the analyst consensus estimate of the company's future 12-month EPS, and the 30-year Treasury yield are all used to create a more accurate reflection of a company's fair value. A total of eleven additional firm specific variables are also used. In addition, the portoflio uses top picks from our Forecast Model. In essence, the portfolio is constructed with the best picks from our main propiretary models

Each month you will receive an electronic copy of our newsletter highlighting 15 potential long positions along with five alternate picks. Our investment strategies focus on dozens of fundamental and technical factors for over 8000 individual stocks, synthesize the data, and then come up with a portfolio. Each newsletter portfolio focuses on maximum potential returns so there are no diversity requirements. Each portfolio pick includes critical ValuEngine valuation and forecast data. These 20 total picks represent the most up-to-date equity assessments of our proprietary models.

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	VE View	S&P 500
VE View vs. S&P 500 Index Past Five Years
Ann Return	21.67%	13.60%
Ann Volatility	22.28%	12.38%
Sharpe Ratio	0.97	1.10
Sortino Ratio	1.67	1.46
Max Drawdown	-34.94%	-11.14%

The ValuEngine View Newsletter is derived from the ValuEngine Aggressive and Diversified Growth BenchmarkPortfolio Strategies. These strategies are the product of ValuEngine's academic research team and combine cutting-edge financial analysis and portfolio construction techniques with real-world Wall St. know how.

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The ValuEngine View Newsletter portfolio has 15 primary stock picks and five alternates and is re-balanced once each month. The ValuEngine View Newsletter is published near the middle of each calendar month. An equal amount of capital is allocated to each stock. The monthly returns are calculated from the closing prices on date of publication. The performance calculation does not include any transaction costs.

ValuEngine Market Overview

Summary of VE Stock Universe
Stocks Undervalued	39.01%
Stocks Overvalued	60.99%
Stocks Undervalued by 20%	11.43%
Stocks Overvalued by 20%	23.14%

ValuEngine Sector Overview

Sector	Change	MTD	YTD	Valuation	Last 12-MReturn	P/E Ratio
Aerospace	-0.41%	-0.78%	4.05%	17.79% overvalued	-4.29%	22.18
Medical	-0.49%	-0.77%	9.27%	14.35% overvalued	10.37%	31.25
Oils-Energy	-1.07%	-1.12%	6.08%	14.16% overvalued	-30.39%	25.39
Computer and Technology	-0.69%	-0.28%	3.69%	11.31% overvalued	5.40%	29.99
Consumer Staples	-0.20%	-0.17%	2.07%	10.81% overvalued	3.49%	24.82
Retail-Wholesale	-0.51%	0.02%	0.84%	9.68% overvalued	8.14%	25.63
Consumer Discretionary	-0.46%	-0.24%	4.92%	8.79% overvalued	0.06%	27.12
Business Services	-0.33%	-0.52%	5.19%	7.38% overvalued	4.80%	25.63
Multi-Sector Conglomerates	-0.28%	-0.24%	3.36%	6.30% overvalued	1.88%	22.42
Utilities	-0.73%	-1.19%	1.07%	5.13% overvalued	-0.51%	22.50
Finance	-0.13%	-0.31%	3.19%	4.56% overvalued	3.88%	17.34
Auto-Tires-Trucks	-0.38%	0.28%	5.06%	4.47% overvalued	-4.09%	17.68
Transportation	-0.37%	-0.22%	2.37%	2.46% overvalued	6.34%	20.24
Industrial Products	-0.41%	-0.82%	1.11%	2.11% overvalued	-7.15%	21.03
Construction	-0.18%	-0.07%	1.05%	0.75% undervalued	-0.57%	23.40
Basic Materials	-0.77%	0.41%	2.97%	0.77% undervalued	-13.49%	24.63

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