Stock Valuations At Historic Levels
Gary Gordon | Aug 27, 2020 12:40AM ET
In late August of 2000, the median stock in the S&P 500 hit its highest Forward P/E level ever. A 12-month Forward P/E of 26.
For the better part of the last two decades, investment gurus routinely rebuked the foolishness of paying 26 times estimates of corporate earnings 12 months out. The notion became emblematic of stock bubble lunacy.
Nevertheless, here in late August of 2020, stock bubble madness is back with a vengeance. Investors have pushed prices up to the point where Forward P/Es for the median stock in the S&P 500 have once again reached 26.
What does it mean when stock valuations reside at the 100th percentile of historical levels? It means that the average (median) stock has never been more expensive.
Meanwhile, some things defy every imaginable aspect of logic. The mania for Apple (NASDAQ:AAPL) shares fits the bill.
According to Michael Lebowitz, sales at Apple over the prior five years have grown at a meager 3.2%. Equally unimpressive? Income has only grown at 1.8%.
Granted, Apple makes wonderful products and provides wonderful services. Yet it is not growing like gangbusters to justify a price-to-book (P/B) of 29.4, a price-to-cash flow (P/CF) of 30.2 or a Current P/E of 37.8.
The above-mentioned valuations are more than double their long-term 10-year averages. In fact, share prices would need to fall 50% just for the stock to approximate Apple’s (AAPL) longer-term metrics.
A 50% haircut to restore sanity? That’s right. And it would have to fall a whole lot further to get those shares on the cheap!
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.