The Market Is Getting Expensive... Here's How To Stay Profitable

By Samuel Taube

There's really no denying it - value investors are having a tough time in the U.S. right now. Our markets are dominated by expensive stocks. As you can see from this week's chart, U.S. equities are sold at a steep markup today compared to other global investments.

It's not hard to see why.

The current bull market is in its ninth year, and the Dow has tripled in price since its 2009 lows. But the index's earnings haven't even doubled over the same time period. The result has been what analysts call multiple expansion. American investors are paying higher prices for each dollar of earnings than they'd pay almost anywhere else in the world.

Some bearish pundits have used our country's high P/E ratio as evidence of an impending crash. We don't agree with them. As Alexander Green recently wrote, these kinds of financial fearmongers are usually wrong - and often driven by ulterior motives.

But we do acknowledge that American large caps just don't offer the same potential upside as other asset classes nowadays.

One way to find value in this environment is to look beyond the U.S.

As you can see above, the countries of the former Soviet bloc have some incredibly cheap equity markets. Hungary's forward P/E ratio is more than 33% lower than ours. Russia's is more than 66% lower. The SPDR S&P Emerging Europe ETF (NYSE: GUR) offers good exposure to both.

South America's equity markets are also appealingly cheap - especially those of Brazil and Peru. Thus, the iShares MSCI All Peru Capped ETF (NYSE: EPU) and the iShares MSCI Brazil Capped ETF (NYSE: EWZ) are good choices for value-focused investors.

But for investors who prefer to keep their money in the land of the free, there are other options.

The high P/E ratio of the U.S. stock market is largely a function of expensive megacaps. Alphabet (Nasdaq: GOOG) (GOOGL) sells for a dizzying 33 times one-year earnings. Amazon (Nasdaq: AMZN) sells for an almost unbelievable 200 times one-year earnings.

It's no wonder these Nasdaq blue chips have hit some choppy waters recently.

But if you look to small cap and midcap U.S. stocks instead, you'll find much more reasonable valuations.

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