Welcome!

Blog Feed Post

2010’s Projected Earnings…. Seriously?

Don’t look now, but the market’s overvalued. That’s probably not earth-shattering to anyone - what else would an investor expect here in the shadow of the worst recession in decades? On the other hand, one would expect those investors to learn some important lessons about valuations.

Perhaps it’s simply a lack of information that’s allowing euphoria to swell up. So, maybe a closer look at valuations will help curb the undeserved enthusiasm… and inject a dose of reality into our collective mindsets.

In other words, let’s compare some current P/E ratios to historical P/E ratios.

Simple Yet Powerful

The method to the madness here isn’t going to be complicated. All we really need to do to get a feel for how overpriced stocks are is compare the current price multiples (based on operating earnings, obviously) to historic ones. We can even break that data out into large cap, mid cap, and small cap groups.

And, just to make it easy and tangible, we’ll base our study on the data provided for some of the key iShares’ exchange-traded funds. By doing so, we’ll also get to add a value-versus-growth analysis.

In any case, the nearby table tells the tale. Operating P/E ratios for the last twelve months are mostly in the low 20’s (to as high as the 22’s) for all the major market caps and styles, with only one exception…. large cap growth. The trailing-twelve-month P/E for large cap growth stocks - the group represented by the iShares Large Cap Growth Fund (IVW) - is a mere 19.2.

How expensive is that? With no exceptions, that’s more expensive than we’ve seen the aggregate market - or any individual market cap and style - during any of the prior five years (some of which were good years, and some not so good).

History Versus the Future

Investors may argue that the past isn’t the future, and we’d fully agree… even though the recent past is frequently a helpful guide to what lies ahead.

Just to address the then/now concern though, nearby you’ll also find a table of historical and projected P/E ratios for those same market segments. The picture looks much brighter when doing so, but plausibility comes into question.

For instance, the iShares Small Cap Fund (IJR) currently boasts a twelve-month price multiple of 22.8 (the value and growth versions of the same small cap group both have comparable P/Es at this point as well). Standard & Poors says the stocks in the S&P 600 Small Cap Index are on pace to turn in a P/E of 31.6 in 2009. (Both can be right, since the timeframes are not aligned.) Yet, Standard and Poors also estimates the stocks in the S&P 600 Index are going to almost double 2009’s earnings during 2010; the forward-looking P/E is 16.94.

Whether the index at large is overvalued relative to 2010’s expectations, and/or the iShares Small Cap Fund is overvalued now, doesn’t really matter…. it’s just not likely that earnings will improve by that much; it would be the cheapest stocks have been in more than a decade if they did. Thus, the ETF is a liability. All of those funds would be a liability for that matter, with these hyper-optimistic projections in place for 2010.

Don’t Read (or Act) Too Much Into It

With all of that being said, it’s important that investors don’t make snap decisions based on the data above. None of the information here should be a shock, and we’re confident most - if not all - of you had the notion in the back of your mind anyway. This analysis just puts a framework around it.

More specifically, this information should not prompt you to bailout on every stock you own and hide your money under your mattress. Why not? Two reasons.

First, the projected earnings numbers are a moving target, and may improve a little as time wears on. In fact, we think they will improve a little as 2009 turns into 2010. That’s one of the benefits of an economic recovery - a call we made weeks ago.

On the other hand, we think stock prices have more ground to give up (by falling) than earnings projections have room to improve (by raised estimates). The two will probably meet in the middle somewhere.

Second, investors can and have rationalized continuing to buy overbought and overpriced stocks, so don’t assume the market will have to come tumbling down tomorrow just to get current P/Es in line with historical P/Es.

Oh, prices may come down a little, or a lot, quickly, or gradually. The valuations tell you the odds and show you the pressures, but valuations don’t make or lose you money - rising or falling stocks make or lose you money. That’s why we rely on charts as much if not more than valuation measures.

The Bottom Line

So what’s the ultimate point then, if the current P/Es may or may not matter?

Our take is simple… they matter more than they don’t. Unless earnings improve better than anticipated next year, an expensive market is going to mean stocks are facing a headwind until 2011 when - hopefully - the economy is stable.

In the meantime though (and this is important), select stocks can and likely will do well, even though the broad market flounders.

That was something that couldn’t be said in late 2008, when all stocks were sinking whether they deserved it or not. Conversely, since March of this year, all stocks were rising whether they deserved it or not. Now, however, the bull market is at the point where the best names are able to break away from the mediocre ones. You’ll obviously want to be a little pickier now than you were then.

As always, we’ll be offering specific stock ideas - in addition to our sector and market cap trend analysis - to help you do just that. Stay tuned on that front though, as the necessity of that info is increasing by the month.

Read the original blog entry...

More Stories By James Brumley

James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.

Latest Stories
DX World EXPO, LLC, a Lighthouse Point, Florida-based startup trade show producer and the creator of "DXWorldEXPO® - Digital Transformation Conference & Expo" has announced its executive management team. The team is headed by Levent Selamoglu, who has been named CEO. "Now is the time for a truly global DX event, to bring together the leading minds from the technology world in a conversation about Digital Transformation," he said in making the announcement.
"Space Monkey by Vivent Smart Home is a product that is a distributed cloud-based edge storage network. Vivent Smart Home, our parent company, is a smart home provider that places a lot of hard drives across homes in North America," explained JT Olds, Director of Engineering, and Brandon Crowfeather, Product Manager, at Vivint Smart Home, in this SYS-CON.tv interview at @ThingsExpo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.
SYS-CON Events announced today that Conference Guru has been named “Media Sponsor” of the 22nd International Cloud Expo, which will take place on June 5-7, 2018, at the Javits Center in New York, NY. A valuable conference experience generates new contacts, sales leads, potential strategic partners and potential investors; helps gather competitive intelligence and even provides inspiration for new products and services. Conference Guru works with conference organizers to pass great deals to gre...
DevOps is under attack because developers don’t want to mess with infrastructure. They will happily own their code into production, but want to use platforms instead of raw automation. That’s changing the landscape that we understand as DevOps with both architecture concepts (CloudNative) and process redefinition (SRE). Rob Hirschfeld’s recent work in Kubernetes operations has led to the conclusion that containers and related platforms have changed the way we should be thinking about DevOps and...
The Internet of Things will challenge the status quo of how IT and development organizations operate. Or will it? Certainly the fog layer of IoT requires special insights about data ontology, security and transactional integrity. But the developmental challenges are the same: People, Process and Platform. In his session at @ThingsExpo, Craig Sproule, CEO of Metavine, demonstrated how to move beyond today's coding paradigm and shared the must-have mindsets for removing complexity from the develop...
In his Opening Keynote at 21st Cloud Expo, John Considine, General Manager of IBM Cloud Infrastructure, led attendees through the exciting evolution of the cloud. He looked at this major disruption from the perspective of technology, business models, and what this means for enterprises of all sizes. John Considine is General Manager of Cloud Infrastructure Services at IBM. In that role he is responsible for leading IBM’s public cloud infrastructure including strategy, development, and offering m...
The next XaaS is CICDaaS. Why? Because CICD saves developers a huge amount of time. CD is an especially great option for projects that require multiple and frequent contributions to be integrated. But… securing CICD best practices is an emerging, essential, yet little understood practice for DevOps teams and their Cloud Service Providers. The only way to get CICD to work in a highly secure environment takes collaboration, patience and persistence. Building CICD in the cloud requires rigorous ar...
Companies are harnessing data in ways we once associated with science fiction. Analysts have access to a plethora of visualization and reporting tools, but considering the vast amount of data businesses collect and limitations of CPUs, end users are forced to design their structures and systems with limitations. Until now. As the cloud toolkit to analyze data has evolved, GPUs have stepped in to massively parallel SQL, visualization and machine learning.
"Evatronix provides design services to companies that need to integrate the IoT technology in their products but they don't necessarily have the expertise, knowledge and design team to do so," explained Adam Morawiec, VP of Business Development at Evatronix, in this SYS-CON.tv interview at @ThingsExpo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.
To get the most out of their data, successful companies are not focusing on queries and data lakes, they are actively integrating analytics into their operations with a data-first application development approach. Real-time adjustments to improve revenues, reduce costs, or mitigate risk rely on applications that minimize latency on a variety of data sources. In his session at @BigDataExpo, Jack Norris, Senior Vice President, Data and Applications at MapR Technologies, reviewed best practices to ...
Widespread fragmentation is stalling the growth of the IIoT and making it difficult for partners to work together. The number of software platforms, apps, hardware and connectivity standards is creating paralysis among businesses that are afraid of being locked into a solution. EdgeX Foundry is unifying the community around a common IoT edge framework and an ecosystem of interoperable components.
"ZeroStack is a startup in Silicon Valley. We're solving a very interesting problem around bringing public cloud convenience with private cloud control for enterprises and mid-size companies," explained Kamesh Pemmaraju, VP of Product Management at ZeroStack, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.
Large industrial manufacturing organizations are adopting the agile principles of cloud software companies. The industrial manufacturing development process has not scaled over time. Now that design CAD teams are geographically distributed, centralizing their work is key. With large multi-gigabyte projects, outdated tools have stifled industrial team agility, time-to-market milestones, and impacted P&L stakeholders.
"Akvelon is a software development company and we also provide consultancy services to folks who are looking to scale or accelerate their engineering roadmaps," explained Jeremiah Mothersell, Marketing Manager at Akvelon, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.
Enterprises are adopting Kubernetes to accelerate the development and the delivery of cloud-native applications. However, sharing a Kubernetes cluster between members of the same team can be challenging. And, sharing clusters across multiple teams is even harder. Kubernetes offers several constructs to help implement segmentation and isolation. However, these primitives can be complex to understand and apply. As a result, it’s becoming common for enterprises to end up with several clusters. Thi...