March 10, 2016

VALUATION WATCH: Overvalued stocks now make up 36.86% of our stocks assigned a valuation and 11.05% of those equities are calculated to be overvalued by 20% or more. Four sectors are calculated to be overvalued.

Rising Up

Valuations Hover Just Below Normal Range

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 36.86% of the stocks we can assign a valuation are overvalued and 11.05% of those stocks are overvalued by 20% or more. These numbers have recovered a bit along with the market rally since the earlier "unpleasantness" of 2016. We are now showing stocks that have recovered in value, are less cheap than last month, and also hovering very close to "normal" range--between 40-60%.

2016 has been a challenge for investors. markets have recovered somewhat over the past month, but are still down between 2-8% (SP500, DOW, and NASDAQ). We have been in a seven-year up market--almost the entirety of the Obama administration--and thus we have a rally that is long-in-the-tooth despite a continuing drumbeat of decent news from the US economy--labor market, housing, autos, etc.

The challenge has come from elsewhere as the Chinese stock carnage and devaluation, along with ongoing problems in Europe, chaos for commodities--especially oil--etc. have battered markets recently. Because of these external factors, we still believe that the Fed move to raise interest rates was premature at best. US growth rates are anemic and the labor market still hasn't provided the sort of wage gains that are to be expected with a full--and fair--recovery. We hope that the Fed might pay attention to more of its two-part mandate by letting unemployment slip enough to boost wages for US workers. We think this would help to further bolster the economy despite the global uncertainties.

In case you hadn't noticed, the US is in a presidential election cycle, which is in the past has correlated to a decent year for stocks. We find that any demands for additional austerity on the part of some right-wing candidates would only damage the US recovery. From the left, we note that one candidate is widely supported by Wall St.-- which is hardly a harbinger of damaging policies for investors. On the other hand, the long-shot Democrat promises a radically different approach, which will certainly take a bite out of the financial sector--if implemented.

In any case, we remain stunned at just how wrong the pundits had it during the last administrative change, when screams of "socialism" and warnings of total economic collapse were the norm. As the long-term valuation chart below illustrates, we have witnessed a remarkable market since the devilish SP500 intra day low of 666 on March 9, 2009.

The chart below tracks the valuation metrics from February 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 February 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.

ValuEngine Market Overview

ValuEngine Sector Overview