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. Vice-versa, a significant rally or reduction in EPS can raise the figure. 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 now calculate that 25.8% of the stocks we can assign a valuation are overvalued and 7.61% of those stocks are overvalued by 20% or more. These numbers have decreased significantly since the beginning of the year--when we saw overvalued stocks making up closer to 40% of the overall total. We are now showing stocks that are cheaper from our Valuation Model's perspective than we have seen since July, 2012 when the S&P 500 was trading at 1337. According to our model's perspective, stocks are cheap right now.
2016 is off to challenging start for investors. Falling oil prices, uncertainty about China, and Fed moves on rates have pushed stock prices down to levels not seen for a while. We have also seen a spate of poor results from companies as varied as Boeing, Apple, and Exxon-Mobil. Bargain hunting is always good, but no one wants to "catch a falling knife."
Looking ahead, we don't see much on the horizon to make the Fed follow through on their plan raise rates again in the near future. That is good news. We also believe that the recent slight weakening of the dollar will bolster some of the business upon which the big international players depend. But the Chinese issue and the continuing carnage in the oil markets are wreaking havoc with sentiment and investor confidence.
We are in a presidential election year, which is often a good thing for the market, but we aren't sure if that maxim will hold this year given the fair amount of bad news floating around out there. As we noted last month, 2016 is proving to be a bit of a downer so far with investors selling off positions and increased volatility rearing its head once again.
The chart below tracks the valuation metrics from February 2015. It shows levels in excess of 40%.
This chart shows overall universe over valuation in excess of 40% vs the S&P 500 from February 2013
This chart shows overall universe under and over valuation in excess of 40% vs the S&P 500 from March 2007*
*NOTE: Time Scale Compressed Prior to 2011