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Steve Hach is the Senior Editor at ValuEngine.com, a Melbourne, Florida-based stock valuation and forecast service. ValuEngine utilizes Ivy League financial research as the basis for its coverage of more than 8000 US, Canadian, and other foreign stocks. Hach utilizes ValuEngine's complex... More
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  • Valuations Pull Back—Barely 2 comments
    Dec 5, 2013 1:59 PM | about stocks: AMD, TNP, AUXL, MNK, SPLS

    VALUATION WATCH: Our models find that overvaluation is at levels typically seen when market pullbacks occur. Overvalued stocks assigned a valuation now make up almost 84% of our universe and 53% of the stocks assigned a valuation are calculated to be overvalued by 20% or more. 15 of 16 sectors are calculated to be overvalued--15 of them by double digits.

    Pressure Relief?
    --Valuations Pull Back-Barely

    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 84% of stocks are overvalued and 52% stocks are overvalued by 20% or more. These are just below the high of 86.25% from a few days ago. Fifteen of sixteen sectors are now calculated to be overvalued--15 of them by double-digit margins. Since our last update Basic Materials has slipped back into undervalued territory--albeit just barely.

    Here is our latest data:

    The chart below tracks the valuation metrics from January 2013.

    (click to enlarge)

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

    (click to enlarge)

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

    (click to enlarge)

    Of course, we recently summarized our views of the overall market conditions and noted that we see lots of positive indicators for equities. As is so often the case when one tries to predict the future, Mr. Market responded to our well-reasoned analysis by taking a dive over the past few days. We view this as a "wobble," not the beginnings of a "correction."

    Over the past 70 years or so, there have been 27 "corrections"--defined as market declines of 10% or more, and twelve full-on "Bear Markets"--which are defined as declines of 20% or more. On average these market declines last around three months with total declines of thirteen percent. In other words, But Markets can last a good long time despite minor dips and wobbles.

    When we take a look at our real time data, we find that the market has had three corrections since the satanic 666 S&P bottom of March, 2009. In the Spring of 2010, there was a 16% drop. In the Summer of 2011, we had another correction in which the drop was 20% and many predicted an impending Bear Market. There was also a dip in Spring 2012 of almost 10%. We have real-time tracking back to 2007 and backtest data back to 2000 in the current dataset (and older data dated back to 1990.) When it comes to the past six years, our overvaluation watches and warnings have coincided with various dips and full-on corrections in most cases.

    If we take a look at conditions before the financial crisis, we saw overvaluation levels in excess of 65%-- as expected. We also had a Valuation Watch prior to the Spring 2010 pull back, and a Valuation Warning prior to the more significant 2011 correction. We did, however, miss the 2012 dip. So, our overvaluation calculations provided an accurate signal for three out of four cases over the past six years. This reminds us that our data set is simply to short to be perfectly accurate.

    While we don't see any other immediate factors necessitating a rethink of our bullish outlook, when analysts and investors suddenly wake up in unison and agree that things are looking up, it is time to be extra wary. Our immediate concern remains the US Congress. The rumblings of yet another budget/debt limit showdown are already occurring in Washington DC. While both parties all claim to have learned a lesson from the recent shut down--which is widely viewed as a disaster for the GOP--one wonders if this go around will be resolved without the brinksmanship and threat of debt default. We have heard so much about "uncertainty" when it comes to the Obama Administration, yet some of those same critics revel in negotiating "strategies" with only serve to chip away at the full faith and credit of the US Government.

    Let's hope the so-called "adults" in Washington have learned from the past few months and that they refrain from any more tantrums. We have rapidly falling short-term deficits thanks to the recovery and sequestration, an ever improving labor market, and signs of real recovery all over the map.

    In the case of our latest Valuation Warning, we have found overheated conditions for seven months now. In that time, the market has powered up to unprecedented levels. We thus remind investors once again that now is no time to get complacent. But what does that mean?

    It does NOT mean you should dump all stocks and move 100% into cash.

    It means setting some prudent stop levels for your current portfolio to guard against any big drops--although "prudent" these days is difficult to define. For our newsletters, we run alternate scenarios with stop levels of 15%. For the past several years these have not boosted performance with any regularity. That suggests they are too tight for the level of volatility which is "normal" these days.

    We also suggest a re-evaluation of your portfolio whereby you lock in gains and rebalance in search of value. Of course, that is also difficult when almost every sector is calculated to be overvalued by 20% or more. Do you really want to be dumping money into precious metals right now? That is pretty much the only place our model still finds lots of undervaluation.

    However, If we run an advanced screen for stocks that are calculated to be undervalued with positive forecasts and momentum, we find individual tickers across the universe. Here is a a top-five list from such a screen ranked by short-term forecast figures. Always perform your own due diligence on screening results, and watch out for the outliers (like AMD):

     

     

    Ticker

    Name

    Mkt Price

    Valuation(%)

    Last 12-M Retn(%)

    Forecast 1-Month Retn(%)

    Forecast 1-Yr Retn(%)

    P/E Ratio

    Sector

    AMD

    ADV MICRO DEV

    3.57

    -33.89

    57.96

    5.54

    43.53

    N/A

    COMPUTER AND TECHNOLOGY

    TNP

    TSAKOS EGY NAVG

    5.12

    -36.14

    51.93

    1.59

    19.03

    N/A

    TRANSPORTATION

    AUXL

    AUXILIUM PHARMA

    18.23

    -32.85

    0.22

    0.95

    11.38

    20.26

    MEDICAL

    QCOR

    QUESTCOR PHARMA

    56.15

    -15.1

    113.42

    0.92

    11.05

    11.27

    MEDICAL

    SPLS

    STAPLES INC

    15.4

    -11.09

    35.8

    0.86

    10.37

    11.85

    RETAIL-WHOLESALE

    Market Overview
     

     

    Summary of VE Stock Universe

     

    Stocks Undervalued

    15.87%

    Stocks Overvalued

    84.13%

    Stocks Undervalued by 20%

    6.17%

    Stocks Overvalued by 20%

    52.43%

    Sector Overview
     

     

    Sector

    Change

    MTD

    YTD

    Valuation

    Last 12-MReturn

    P/E Ratio

    Aerospace

    -0.21%

    -1.58%

    36.52%

    25.79% overvalued

    47.80%

    17.72

    Auto-Tires-Trucks

    -0.26%

    -1.59%

    47.42%

    26.73% overvalued

    49.44%

    19.93

    Basic Materials

    0.62%

    -1.22%

    8.62%

    0.69% undervalued

    -24.16%

    20.22

    Business Services

    -0.54%

    -1.81%

    34.96%

    27.58% overvalued

    39.32%

    25.62

    Computer and Technology

    -0.14%

    -0.96%

    44.85%

    28.34% overvalued

    35.50%

    31.17

    Construction

    -0.02%

    -2.10%

    36.07%

    16.18% overvalued

    30.70%

    25.17

    Consumer Discretionary

    0.16%

    -1.45%

    41.15%

    27.99% overvalued

    42.62%

    28.43

    Consumer Staples

    -0.53%

    -1.31%

    27.77%

    24.02% overvalued

    24.82%

    23.28

    Finance

    -0.12%

    -1.06%

    26.88%

    22.44% overvalued

    17.17%

    17.94

    Industrial Products

    -0.39%

    -1.50%

    40.75%

    25.03% overvalued

    40.14%

    23.3

    Medical

    -0.48%

    -0.97%

    42.50%

    29.10% overvalued

    39.39%

    29.05

    Multi-Sector Conglomerates

    -0.32%

    -1.24%

    15.42%

    35.60% overvalued

    24.52%

    19.78

    Oils-Energy

    -0.17%

    -1.00%

    24.33%

    12.72% overvalued

    16.06%

    26.03

    Retail-Wholesale

    -0.59%

    -1.90%

    39.14%

    25.36% overvalued

    38.36%

    24.48

    Transportation

    0.02%

    -1.26%

    34.65%

    25.48% overvalued

    44.72%

    21.84

    Utilities

    -0.04%

    -1.26%

    17.55%

    12.34% overvalued

    15.75%

    19.85

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: market valuations Stocks: AMD, TNP, AUXL, MNK, SPLS
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Comments (2)
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  • Savagekin
    , contributor
    Comment (1) | Send Message
     
    Out of curiosity, when you say to look for outliers like AMD is that suggesting that it should be disregarded? Or that it is a shining example of a stock which is undervalued in an overvalued market?

     

    Thanks
    5 Dec 2013, 07:33 PM Reply Like
  • Steve Hach
    , contributor
    Comments (4) | Send Message
     
    Author’s reply » By "outlier" I mean when a stock has a really good looking forecast like that it is always best to be wary. Of course a 5% 1-month gain or a 45% 12 month gain is easily achieved. But, it can be the case that the model reads some sort of volatility or inflection point and extrapolates that out and makes a particular equity look to good to be true. Due diligence and further research is always required.
    13 Dec 2013, 03:38 PM Reply Like
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