Skip to main content

Does the market deserve to be this over-sold? Value analysis might surprise you

Stocks just finished May with a fairly awful performance. As I looked through some of the data generated by my Alert HQ process I saw some of the indicators had actually gotten worse than during the period around March 2009 and others were getting close.

I had to ask myself the question that is the title of this post: Does the market deserve to be this over-sold?

Stocks can continue in an over-sold state until fear dissipates, values become compelling and buyers are motivated to return to the market. Are we at that point yet?

Fear is difficult to quantify but we can put a number on value. Common measures of value are Price-Earnings ratios (PE) and Enterprise Value-to-EBITDA ratios. EBITDA is earnings before interest expenses, taxes, depreciation and amortization. Many investors prefer to look at the EV-to-EBITDA ratio because it avoids some of the games that can be played when calculating the earnings component that goes into the PE ratio.

PE Ratio analysis --

The following table shows a breakdown of stocks into categories based on PE. Typically PE less than 16 implies that a stock is still a reasonable value, 16 to 30 means the stock may be getting a bit pricey but almost all growth stocks are in this range so it is not necessarily a bad thing. PE greater than 30 is definitely getting away from value.

Description Count % of total
No PE available or PE less than 0 (ie: not profitable) 1841 34%
PEs less than or equal to 16 1711 31%
PEs between 16 and 30 1065 20%
PEs greater than 30 822 15%
Count of all stocks 5439 100%

As this table shows, roughly one third of stocks are not profitable at all, roughly have of all stocks are reasonably priced and only 15% of stocks are over-priced. Indeed, almost one third of stocks are in the sweet spot where PE is less than 16.

PE analysis does not suggest to me that stocks are over-valued and deserve to fall further. There are always tons of companies that are unprofitable, even during the best of times. Most stocks seem to be fairly valued or are even somewhat cheap

EV-to-EBITDA analysis --

This next table takes the same approach as above while looking at the EV-to-EBITDA ratio.

Description Count % of total
No EV-to-EBITDA value available or EV-to-EBITDA ratio less than or equal to 0 (ie: not profitable) 2090 38%
EV-to-EBITDA ratio less than or equal to 6 718 13%
EV-to-EBITDA ratio between 6 and 12 1591 29%
EV-to-EBITDA ratio greater than 12 1042 19%
Count of all stocks 5439 100%

The results here are very similar to our PE analysis. Roughly a third of stocks are apparently unprofitable. Nearly half of all stocks are good values or decent values. Less than 20% are pricey.

Conclusion --

The market certainly does not appear to be over-valued here. Based on the analysis laid out above, it is hard to see why stocks should fall any further.

On the other hand, there is still fear of Europe, fear of financial reform, fear the job market is not improving fast enough, fear of Obama, fear of inflation, fear of deflation, etc. In other words, the usual litany of issues that the bears so delight in describing over and over.

There is always worry about the future. What's so different about this list of worries? Not all that much. Eventually, the fundamentals will win out and value will be recognized. It shouldn't be long now.

Comments

Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…