VALUATION WATCH: Valuation is now well within "normal" range. Overvalued stocks now make up 50.36% of our stocks assigned a valuation and 15.45% of those equities are calculated to be overvalued by 20% or more. Fourteen sectors are calculated to be overvalued--one by double digits.
With Latest Market Action, Overvaluation Now "Normal"ValuEngine tracks more than 7000 US equities, ADRs, and foreign stock which trade on US exchanges as well as @1000 Canadian equities. 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 2800 stocks in our US Universe.
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 last valuation warning on August 19, 2014. At that time, the S&P was at 1971.74. Prior to that warning, we had essentially operated under an overvalued market environment with a Valuation Warning or Watch in effect since May, 2013. We now calculate that 50.36% of stocks are overvalued and 15.45% of those stocks are overvalued by 20% or more. Yesterday's market pull back-- combined with changes in earnings and stock prices-- have resulted in figures that are now the lowest recorded since January 2, 2013.
In addition to the overall valuation metrics, we see that on a sector basis the declines in overvaluation have also relived some pressure. Fourteen of sixteen sectors remain overvaluedand only one of is calculated to be overvalued by double digits. This is quite different from the situation over the past few months.
With these sorts of numbers, we find ourselves back in "normal" range from a valuation perspective. While the market may decline further, those investors looking for a "Buy" signal may certainly find one from the perspective of our valuation model. On the other hand, this rally has been unstoppable for most of the Obama Administration. Some analysts say we are due for a pullback.
However, we do not believe that Ebola will pose a problem for the US. We do not believe that the Federal Reserve is going to hastily pull back from their current policies--which have provided the market so much succor. Nor do we find a negative economic environment within the US--with the exception of the lagging labor market and the failure of the recovery to really take off for workers.
In the recent past, the market has shaken off these sorts of setbacks. We would expect that trend to continue. So, this momentary respite from high valuations may be a time to reinforce existing positions or make purchases of stocks which up until now had been overheated from a valuation perspective.
The chart below tracks the valuation metrics from January 2013. It shows overvaluation levels in excess of 50%. We issue a Valuation Watch when the metric exceeds 60% and a Valuation Warning when the metric exceeds 65%.
ValuEngine Market Overview
Summary of VE Stock Universe | |
Stocks Undervalued | 49.64% |
Stocks Overvalued | 50.36% |
Stocks Undervalued by 20% | 16.13% |
Stocks Overvalued by 20% | 15.45% |
ValuEngine Sector Overview
Sector | Change | MTD | YTD | Valuation | Last 12-MReturn | P/E Ratio |
Consumer Staples | -1.21% | -1.15% | -0.46% | 12.31% overvalued | 10.34% | 24.69 |
Computer and Technology | -1.83% | -1.71% | 1.08% | 9.49% overvalued | 7.86% | 31.21 |
Multi-Sector Conglomerates | -1.09% | -1.05% | -1.24% | 9.21% overvalued | 6.11% | 21.61 |
Medical | -1.24% | -1.15% | 6.65% | 7.50% overvalued | 12.86% | 30.15 |
Aerospace | -2.34% | -2.21% | -3.37% | 7.45% overvalued | 20.35% | 19.24 |
Transportation | -2.19% | -2.08% | 3.03% | 6.37% overvalued | 12.37% | 19.62 |
Retail-Wholesale | -1.39% | -1.32% | -8.50% | 6.05% overvalued | -0.52% | 23.64 |
Finance | -0.87% | -0.76% | 1.14% | 5.22% overvalued | 6.19% | 17.31 |
Consumer Discretionary | -1.46% | -1.33% | -5.95% | 3.99% overvalued | 3.86% | 27.64 |
Utilities | -1.11% | -1.07% | 3.85% | 3.32% overvalued | 8.40% | 19.69 |
Business Services | -1.52% | -1.44% | -3.04% | 3.01% overvalued | 15.12% | 23.60 |
Oils-Energy | -2.02% | -1.91% | 5.64% | 2.05% overvalued | 7.55% | 24.89 |
Industrial Products | -1.53% | -1.37% | -5.48% | 1.06% overvalued | 6.41% | 22.04 |
Auto-Tires-Trucks | -3.44% | -2.85% | -4.43% | 0.38% overvalued | 2.43% | 16.31 |
Construction | -0.87% | -0.80% | -3.35% | 0.25% undervalued | 5.81% | 23.83 |
Basic Materials | -1.12% | -1.01% | -2.19% | 10.11% undervalued | -3.69% | 24.73 |