The market has run a hefty 51% since its bottom on March
9. Stocks like
Diamond Offshore (NYSE: DO) and
EMC (NYSE: EMC) have even outpaced the
benchmark, running up more than 60%.
However, according to Thomson Reuters, while 73% of the
S&P 500 companies beat second-quarter earnings
expectations, 52% of those same companies posted
worse-than-forecast revenue growth. The earnings beats from
companies like
Caterpillar (NYSE: CAT) and
IBM (NYSE: IBM) were largely due to
cost-cutting measures.
A run-up in prices and a mixed growth picture prompt the
question: Are stocks still undervalued at current price
levels? You can purchase
the best companies in the world, but if you buy them when
they're overvalued (or even at fair value), you're hurting
your odds of making money in the market.
To gain insight into where valuations stand right now I
spoke to a panel of experts:
BlackRock
David Kelly, chief market strategist at
JPMorgan
Uri Landesman, head of global growth at
ING Investment Management
John Linehan, co-director of
T. Rowe Price 's U.S. equity division and
portfolio manager of the
T. Rowe Price Value Fund
What follows is an edited version of what our experts had
to say:
How are valuations on stocks now across the
board?
David Kelly: They're expensive if you look at
the last year of earnings. Over the last 20 years, the P/E
ratio of the S&P 500, looking at operating earnings, has
been 19.6 times the last year of operating earnings. Right
now we're running at about probably 25 times the last year of
operating earnings. The last year we did $40, all told, on
S&P 500 operating earnings with the S&P just over
1,000. So at 25 times earnings that is above normal.
But I think it's important to be a little forward looking
here. That $40 in operating earnings over the last year is
extraordinary. It won't be repeated I hope. We're already at
a run rate on operating earnings of about $60.
By 2011, I think we'll probably be back to where we were
in 2007. So if you get earnings back up to $80, say in the
next two years, and the S&P 500 didn't go up from here
then you're talking about a P/E ratio of 12.5 times as
opposed to 25 times.
I think if you assume there will be a normal recovery of
the economy, and therefore a recovery to normal levels on
earnings from the incredibly low levels we've seen in the
last year, if you look at that, then stocks are still
somewhat cheap. Continued... |