- If we’re going to use valuation metrics to make important financial planning and investment decisions why wouldn’t we use the most reliable metrics at our disposal?
- The Price/Sales ratio has a much higher correlation to actual subsequent returns than Price/Earnings.
- Price/Sales, and other reliable metrics, indicate the U.S. stock market is more expensive than it’s ever been in history.
Continue reading “Price/Sales is Better Than Price/Earnings…for forecasting future returns”
Tell me what sales per share will be in twelve years’ time along with the profit margin and the price-to-earnings ratio, and I will tell you the price twelve years from now.
It’s just simple arithmetic. Easy, right?
Well, yes, it is actually not as difficult as you might think. Continue reading “Determinants of Return and A Forecast”
What a year.
The widely followed S&P 500 index ended 2020 over 16% higher (18.4% total return w/ dividends) than it began the year even as it experienced one of the sharpest 34% declines in history (mid-February to mid-March).
The U.S. stock market managed a great year even in the midst of a global pandemic that saw businesses shut down, tens of millions of people lose their jobs, spike in corporate defaults, a steep recession (we’re still in BTW) and S&P 500 earnings that declined 13.6% from the prior year.
This means the entire increase in the S&P 500 was from expansion of the Price/Earnings multiple to over 30x, which is a level ONLY seen throughout history in the Dot-Com Bubble and Great Financial Crisis. The long-term average is about 16x. Continue reading “BRIEF: Year End Market Returns Summary”
Often in the past I’ve discussed current market valuations and implications for market returns over the next decade. In those statements I’m careful to refer only to the most reliable valuation metrics with reliability defined as having the greatest correlation to actual subsequent returns throughout history.
This distinction must be made because it’s the least reliable valuation metrics that often get tossed around by retail investors, the financial media and even professional advisors. Continue reading “Cyclicality of Profit Margins and Why Most Common Valuation Metrics Are Unreliable”