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August 18,2014


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VALUATION WATCH: Overvalued stocks now make up 49.77% of our stocks assigned a valuation and 17.67% of those equities are calculated to be overvalued by 20% or more. Ten sectors are calculated to be overvalued--with two at or near double digits.

Return to "Normalcy"?
Valuations Dip On Chinese Pull Back

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 49.77% of stocks are overvalued and 17.67% of those stocks are overvalued by 20% or more. These figures have been decreasing over the summer as the market has been volatile and subjected to some battering from events in the Eurozone, Greece, and--now--China. We have also seen a big hit for oil prices and Apple shares (whose stock price can have a disproportionate effect on key indices.)

We did our last valuation study on June 25th, and with many stocks putting in some of that "Sell In May and Go Away" price action, valuation levels have declined significantly from levels in excess of 68% or so on June 24th to the current "normal" range of @50%. We saw figures as low as 46% earlier this month, and you would have to go all the way back to early February--with the S&P 500 trading at 2020-- to find stocks that cheap.

As always, the key part of the puzzle for US equity prices remains the Fed and how they will end the era of quantitative easing. "September" has been the response for quite some time now, but events keep interfering with the best efforts of US central bankers to get back to a "normal" interest rate environment.

China's long-demanded (be careful what you wish for!) currency devaluation and their market pull back has sent shock waves throughout the global financial system. This hurts stock prices in the US, but--paradoxically, it helps bolster than too as it becomes difficult to imagine the Fed making any move higher rates in a period of global uncertainty.

Meanwhile, the domestic economic picture remains solid. Good news on the employment front, some indication of wage pressures, signs of a pop in housing?, lower oil prices, and--now--the possibility of cheaper Chinese goods thanks to the currency devaluation.

That should go a long way in assuaging fears of inflation on teh part of the Fed--and again lowers the possibility of some rapid rate-rise in the Fall. As long as they fulfill their promise to pay attention to BOTH sides of their mandate--manage inflation AND promote full employment, they should be able to keep their foot on the pedal for a while longer.

And again, US equities remain standing as the last bastion of decent yield for scared investors the world over. As we have been saying for a while now, we remain confident that the underlying US economy is strong-- and getting stronger. However, we live in an interconnected world and China has a cold. Therefore we remain convinced that the Fed will raise rates later rather than sooner, and US stocks should benefit from this environment as long as the crises in other areas don't become unmanageable.

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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 2013

 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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Looking for a monthly portfolio of stock picks which are objective and based on cutting-edge academic theory and Wall St.practice? Then subscribe to The ValuEngine View Newsletter.The ValuEngine View Portfolio is based on our highly-refined and tested ValuEngine Portfolio Strategies along with our proprietary quant-based composite scoring system. The ValuEngine View Newsletter is the product of sophisticated stock valuation and forecast models first developed by Yale Professor of Finance Zhiwu Chen.

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 vs. S&P 500 Index Past Five Years
VE View
S&P 500
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
50.23%
Stocks Overvalued
49.77%
Stocks Undervalued by 20%
20.45%
Stocks Overvalued by 20%
17.67%

ValuEngine Sector Overview

Sector
Change
MTD
YTD
Valuation
Last 12-MReturn
P/E Ratio
0.75%
-1.84%
14.19%
13.03% overvalued
13.13%
31.99
-0.18%
-1.22%
3.09%
12.51% overvalued
-1.07%
20.86
-0.24%
-1.87%
0.06%
7.51% overvalued
-1.03%
22.16
0.60%
-0.45%
4.78%
6.58% overvalued
-2.32%
24.41
0.32%
-1.41%
-2.28%
3.79% overvalued
5.79%
24.85
0.48%
-0.30%
6.72%
3.34% overvalued
-0.17%
28.15
0.09%
-0.40%
1.80%
2.00% overvalued
-0.82%
17.51
0.40%
-0.65%
-0.67%
1.88% overvalued
-2.15%
29.12
0.31%
-2.44%
-3.56%
0.93% overvalued
-7.28%
22.92
0.19%
-0.77%
-3.54%
0.71% overvalued
-5.06%
21.40
0.09%
0.88%
3.58%
3.53% undervalued
0.58%
24.21
-0.10%
-1.24%
-2.48%
4.17% undervalued
-9.36%
19.26
0.03%
-0.86%
-1.42%
5.08% undervalued
-8.76%
15.62
0.04%
-2.81%
-5.46%
5.43% undervalued
-8.23%
17.11
0.51%
1.17%
-10.97%
15.56% undervalued
-34.17%
21.81
-0.70%
-4.67%
-15.66%
15.92% undervalued
-46.45%
23.37

 

 

 

 

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