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Steve Hach is the Senior Editor at ValuEngine.com, a Newtown, Pennsylvania-based stock valuation and forecast service. ValuEngine utilizes Ivy League financial research as the basis for its coverage of more than 7000 US, Japanese, and Canadian, and other foreign stocks. Hach utilizes... More
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  • ValuEngine.com FInds Extreme Overvaluation Levels 0 comments
    Nov 8, 2013 2:34 PM

    Valuations Reach Very High Levels

    The ValuEngine Valuation Model tracks more than 8000 US equities, ADRs, and foreign stock which trade on US exchanges. When EPS estimates are available for a given equity, our model calculates a level of mispricing or valuation percentage for that equity based on earnings estimates and what the stock should be worth if the market were totally rational and efficient--an academic exercise to be sure, but one which allows for useful comparisons between equities, sectors, and industries. Using our Valuation Model, we can currently assign a VE valuation calculation to more than 3600 stocks.

    We combine all of the equities with a valuation calculation to track market valuation figures and use them as a metric for making calls about the overall state of the market. Two factors can lower these figures-- a market pullback, or a significant rise in EPS estimates. Whenever we see overvaluation levels in excess of @ 65% for the overall universe and/or 27% for the overvalued by 20% or more categories, we issue a valuation warning. We issued our latest valuation warning on May 8th. At that time, the S&P was at 1625.

    As of yesterday's close, we now calculate that almost 82% of stocks are overvalued and 47% of stocks are overvalued by 20% or more. These are the highest readings we can recall. Combine this with the fact that ALL sectors are now calculated to be overvalued--15 of them by double-digit margins--and we find that the market is really getting overheated in relation to current earnings levels.

    We thus remind investors once again that now is no time to get complacent. In the past, overvaluation levels this high have correlated fairly well to market pull backs. Of course, those figures were not posted in an era of QE on the part of the Fed, and they were not posted in this sort of economic recovery. We believe the recovery still has room to run barring some sort of self-inflicted budgetary nonsense from Washington,. We also believe that Fed nominee Yellen will pay more than lip service to the Fed's OTHER mandate--employment. The market remains the only real game in town as far as returns go these days, and we are getting some IPO mania reminiscent of a happier time as well. These factors should allow the bull to run further, but still, overvaluation in excess of 80% is truly unprecedented.

    The chart below tracks the valuation metrics from January 2013 until today.

    (click to enlarge)

    This chart shows overall universe under and over valuation in excess of 50% vs the S&P 500 from June 2012 to the present.

    (click to enlarge)

    This chart shows overall universe under and over valuation in excess of 50% vs the S&P 500 from March 2007 to the present.

    (click to enlarge)

    In addition to the overall valuation metrics, we see that on a sector basis ALL sectors are calculated to be overvalued. In the past, our Chief Market Strategist Richard Suttmeier has used the sector valuation figures to buttress his macro market calls. This is another indicator that investors should consider implementing additional risk management tools and/or booking some profits.

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