ValuEngine: Market Overvaluation Remains Elevated
Long/Short Equity, Long Only
Contributor Since 2010
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 65.45% of the stocks to which we can assign a valuation are overvalued and 32.41% of those stocks are overvalued by 20% or more. These numbers are similar to what we saw when we published our last valuation study in November.
However, they have increased--and have ran slightly above--the levels needed to declare our first valuation warning since June, 2015. At that time, the SP500 was at the 2100 level. Needless to say, from our model's perspective, equities are nowhere near as "cheap" as they were back in late June of this year in the aftermath of "Brexit."
The so-called "Trump rally" or "post-election uncertainty rally" has been a boon for the stock markets. Almost every major index has made new highs and flirts with them almost every day. Things have cooled off a bit in the new year, but still, we got a nice pop to close out 2016.
Even the Fed decision to raise rates slightly in December did little to cool off the ardor for equities. Of course, we believe that the central blank should refrain from additional rate hikes until workers can fully benefit from the recovery. For now, we caution investors to remain vigilant for a move to the downside and to consider booking some profits and perhaps ad some protection against a downside move.
The chart below tracks the valuation metrics so far this Summer/Fall. It encompasses the lead up to the election and the post-election rally. It shows levels in excess of 40%.
The chart below tracks the valuation metrics from January 2016. It shows levels in excess of 40%.
This chart shows overall universe over valuation in excess of 40% vs the S&P 500 from January 2014
This chart shows overall universe under and over valuation in excess of 40% vs the S&P 500 from March 2007*
ValuEngine Market Overview*NOTE: Time Scale Compressed Prior to 2011.
| Summary of VE Stock Universe | |
| Stocks Undervalued | 34.34% |
| Stocks Overvalued | 65.66% |
| Stocks Undervalued by 20% | 14.63% |
| Stocks Overvalued by 20% | 29.93% |
ValuEngine Sector Overview
| Sector | Change | MTD | YTD | Valuation | Last 12-MReturn | P/E Ratio |
| Multi-Sector Conglomerates | 0.10% | 1.77% | 1.77% | 19.26% overvalued | 26.70% | 20.16 |
| Industrial Products | 0.33% | 1.67% | 1.67% | 18.57% overvalued | 38.55% | 24.76 |
| Oils-Energy | -0.82% | 2.35% | 2.35% | 17.69% overvalued | 63.22% | 27.37 |
| Finance | 0.31% | 0.61% | 0.61% | 14.84% overvalued | 25.75% | 17.92 |
| Aerospace | 0.50% | 1.96% | 1.96% | 14.02% overvalued | 22.06% | 20.73 |
| Basic Materials | -0.02% | 4.96% | 4.94% | 13.36% overvalued | 91.89% | 28.66 |
| Transportation | 0.36% | 3.46% | 3.46% | 11.91% overvalued | 32.94% | 18.63 |
| Business Services | 0.10% | 0.37% | 0.37% | 11.70% overvalued | 20.09% | 24.41 |
| Utilities | -0.36% | 1.32% | 1.32% | 10.99% overvalued | 28.32% | 22.04 |
| Construction | 0.01% | 0.58% | 0.58% | 10.57% overvalued | 39.55% | 20.40 |
| Computer and Technology | 0.27% | 2.39% | 2.97% | 9.71% overvalued | 26.81% | 31.08 |
| Auto-Tires-Trucks | 0.05% | 1.25% | 1.25% | 7.47% overvalued | 41.71% | 14.73 |
| Consumer Staples | -0.12% | 1.25% | 1.25% | 5.93% overvalued | 17.25% | 23.88 |
| Consumer Discretionary | -0.39% | 0.59% | 0.59% | 4.60% overvalued | 27.00% | 24.35 |
| Retail-Wholesale | 0.01% | -0.16% | -0.16% | 0.68% overvalued | 13.48% | 23.08 |
| Medical | -0.30% | 4.64% | 4.64% | 4.14% undervalued | 7.73% | 28.07 |
ValuEngine.com is an independent research provider, producing buy/hold/sell recommendations, target price, and valuations on over 7,000 US and Canadian equities every trading day.