Stocks Are Fairly Valued -- at Long Last!http://www.fool.com/investing/value/2009/03/11/stocks-are-fairly-valued-at-long-last.aspx Alex Dumortier, CFA
March 11, 2009
With the S&P 500 off more than 50% from its 2007 high, investors naturally want to know whether we are in for further declines. Unfortunately, we don't know the answer to that question, but, for patient investors, there may some cause for optimism. When I contacted Andrew Smithers, a financial economist who advises institutional investors, he indicated that U.S. stocks were near fair value or perhaps even undervalued.
Why listen to Smithers? There are any number of strategists/economists/experts who have an opinion on the stock market. But Smithers' analysis is based on sound fundamental principles (I recommend his excellent Valuing Wall Street), and he has a verifiable track record of prescient calls.
An early prophet
We are now in the middle of just such a recession, and the only reason it was pushed out to 2008 was the Fed's feats of policy contortionism.
"The S&P 500 seems to be fairly valued or even a little under valued"
At the moment, half of the stocks in the S&P 500 are trading at less than 15 times their average earnings from continuing operations per diluted share (this does not include the 40 stocks with negative average earnings). They include:
Source: Capital IQ, author's calculations; *based on closing prices on March 9, 2009.
Fair warning: Asserting that stocks are fairly undervalued doesn't imply that stocks can't go lower. According to data from Professor Robert Shiller, who has championed the use of 10-year average earnings to derive a meaningful P/E ratio, the market's ratio fell below 10 during the three longest recessions of the past century (The Great Depression in 1929-33, the oil shock in 1973-5, and 1981-2).
The most likely (real) return is the long-term real return: 6.02%
Don't take the advice of a banker!