How cheap is 500 for the S&P 500 (price/earnings)?

[Cutten]

Quote from clambill:

Well, thanks for all the replys but I was also thinking along the lines of..."when will everyone including his dog be hot and horny to buy"?

What constitutes a value that you cannot overlook anymore?

For profitable normal firms - PE of 5, dividend yield of 10%+, price to book of 0.5 or lower.

For great business franchises - PE of 7-10, dividend yield of 6-8%, price below book value.

For mediocre or loss-making firms - market cap 50% less than their net cash in the bank. Analysis showing you they have 1% or less risk of bankruptcy.

 

[short&naked]

Quote from stock_trad3r:

the consensus is 12. look it up

Market cheerleaders (like you) invariably use "pro forma" or "operating earnings," which exclude some expenses and are deceptively optimistic. They are useless and should be ignored (like you).

We are at 28 and don't say otherwise.

 

[m22au]

Cutten,

Thanks for your thoughts on this.

However as you will know, dividends are being cut like crazy, because companies want to conserve cash and to avoid capital raisings.

So let's assume that the dividend yield on the S&P 500 reaches 6% tomorrow. So potentially this could mean that it is time to buy equities.

However what if 3 months down the track, S&P 500 dividends are cut again, resulting in further downward movement on share prices?

ie, Do you wait until dividends are no longer being cut like crazy?

Or should you be selective and only buy specific stocks that you think have reached prices that represent "extremely good value" ?

Quote from Cutten:

Don't focus on earnings. P/Es are useless in a harsh recession or depression with financial collapse, because earnings will obviously be at a trough or negative for many stocks in the index.

You should look at more robust valuation measures such as price to sales, price to book, market capitalization as a % of GDP, and dividend yields. Be aware of likely cuts/falls in those measures as well.

IMO stocks will need to go to pretty fat dividend yields before a bottom is put in. Work out the implied S&P price if dividends were to yield a conservative 6%, for example. And it's quite possible blue chip yields go to 10 or 12%, as they did in the UK in late 1974.

 

[Traden4Alpha]

Quote from stock_trad3r:
the consensus is 12. look it up

That's Shiller's PE that's at 12 (which is based on averaging the last 10 yrs of earnings). And if you look at Shiller's work then you'd know that his PE needs to drop down to at least 8 (and maybe as low as 5) after a big bubble of above average PEs. So PE=12 is NOT cheap. Perhaps when spooz approach 466 (PE=8), then we should revisit but this market might go as low as 291(PE=5).

Shiller's methods also have the problem that his current PE includes data from the juicy earnings years of the housing bubble and a year or so from the dot-com bubble. The next 10 years of earnings are likely to be much lower due to deleveraging, debt burden, and taxes.

To read more, see: http://www.businessinsider.com/new-low-on-shiller-pe-12x-normal-trough-low-is-8x-2009-3

 

[riskfreetrading]

Quote from Cutten:

For profitable normal firms - PE of 5, dividend yield of 10%+, price to book of 0.5 or lower.

For great business franchises - PE of 7-10, dividend yield of 6-8%, price below book value.

For mediocre or loss-making firms - market cap 50% less than their net cash in the bank. Analysis showing you they have 1% or less risk of bankruptcy.

There is really no difference in the above distinction. For instance, with 10% dividend, a PE of 5 really means half earning is taken out for the dividend, which essentially means one is owning a stock with PE of 10. (as earning after dividend are half the reported earnings for the above example). You can extend the reasoning to the other pairs of PEs, and dividends. You will realize that the numbers point to the same conclusion: all companies will then be equivalent as they are correctly priced, when you extract dividend and look the remaining earning. If they are different in earnings (that is left after dividends), the above numbers, while they may look different, are mainly saying whether earnings are expected to go down, up or flat.

There is no such a thing as a better/good companies, etc. The market prices them at the correct fair price.

The real analysis and distinction is the prospect of futures earnings, and how their discounted values compare to a five year corporate bond. If less be a lender, if more own equity, assuming future earnings are positive and growing. (you can look at sales, industry, etc, to make a projection/forecasting).

My point is that the above numbers are meaningless to classify companies as good or less good. The market has correctly priced things.

 

[short&naked]

Quote from riskfreetrading:

There is really no difference in the above distinction. For instance, with 10% dividend, a PE of 5 really means half earning is taken out for the dividend, which essentially means one is owning a stock with PE of 10. (as earning after dividend are half the reported earnings for the above example). You can extend the reasoning to the other pairs of PEs, and dividends. You will realize that the numbers point to the same conclusion: all companies will then be equivalent as they are correctly priced, when you extract dividend and look the remaining earning. If they are different in earnings (that is left after dividends), the above numbers, while they may look different, are mainly saying whether earnings are expected to go down, up or flat.

There is no such a thing as a better/good companies, etc. The market prices them at the correct fair price.

The real analysis and distinction is the prospect of futures earnings, and how their discounted values compare to a five year corporate bond. If less be a lender, if more own equity, assuming future earnings are positive and growing. (you can look at sales, industry, etc, to make a projection/forecasting).

My point is that the above numbers are meaningless to classify companies as good or less good. The market has correctly priced things.

The market correctly prices stocks? So the market correctly priced the NASDAQ in 1998-2000?