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Steven Chen
Steven Chen
Articles (194)  | Author's Website |

A Recap on Market Valuation

The Warren Buffett Indicator is still telling you not to bet on America

The global stock market has had quite a tough ride over the last few weeks, with many significant regions, including the U.S., ending up in bear-market territory. After the turmoil and panic selling, investors may want to ask whether stocks are cheap by now. The quick answer a no, according to the "Buffett Indicator," named as such because it isWarren Buffett (Trades, Portfolio)s favorite indicator of total market valuation.

As you can see below, the Buffett Indicator, which measures the ratio of the total market cap of U.S. stocks to U.S. GDP is standing near 125%. While the ratio is below its record highs by approximately 25%, historically, a figure between 75% and 90% would indicate a fairly priced market. Accordint to GuruFocus data, a reading of 125% still implies significant overvaluation. Judging via this indicator, we also notice that the market has been expensive since late 2012.

Checking individual stocks, we find that all of our selected quality names are valued an average of 170% above their lows during the last recession and 34% above historical median levels, based on free cash flow yield (see the table below). Among the top ten, Church & Dwight is the cheapest, with an approximately 5% free cash flow yield.

Company

Current P/FCF (as of 3/13/2020)

Historical low of P/FCF in 2008/2009

Historical Median

MasterCard (NYSE:MA)

36.94x

20.44x

28.18x

Rollins (NYSE:ROL)

43.93x

16.19x

30.19x

Brown-Forman (NYSE:BF.B)

42.02x

13.51x

36.96x

Estee Lauder (NYSE:EL)

36.01x

11.19x

28.72x

Intuitive Surgical (NASDAQ:ISRG)

48.01x

18.88x

31.98x

Church & Dwight (NYSE:CHD)

20.18x

14x

20.47x

Intuit (NASDAQ:INTU)

31.74x

13.77x

20.4x

Nike (NYSE:NKE)

35.99x

15.02x

29.67x

MarketAxess (NASDAQ:MKTX)

56.35x

9.18x

32.82x

Graco (NYSE:GGG)

27.54x

7.37x

22.49x

Average

37.87x

13.96x

28.19x

For comparison, the total U.S. market is currently 119% above its low in the last recession, based on the BuffettIndicator. It appears to us that the market has been quite selectively selling off shares so far. Overall, the market is still expensive, despite being 20% less so compared to a month ago.

While long-term investors may still be having a hard time finding attractive value, insiders seem to disagree. As indicated below, insiders have switched from the net sellers to net buyers within a month. Nonetheless, out of the above ten companies, only MasterCard has seen such an encouraging activity.

Although the BuffettIndicator is still telling us not to bet on America, there may be some value mounting up overseas. As displayed in the chart below, the valuations of German, Australian, French and British markets are getting close to their respective lows in the Global Financial Crisis, and the Singaporean market has already hit a decade low in terms of the ratio.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Nike, Intuitive Surgical, MasterCard, and Rollins.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


Rating: 5.0/5 (6 votes)

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Comments

patrickvano
Patrickvano premium member - 4 months ago

Do you account for the fact that much of the earnings from companies in America comes from overseas? May not make sense to focus on just US GDP. Thanks!

Steven CHEN
Steven CHEN - 4 months ago    Report SPAM

Thanks for the question! You might want to check out this page - https://www.gurufocus.com/stock-market-valuations.php. Specifically, "A quick refresher (Thanks to Greenbacked): GDP is “the total market value of goods and services produced within the borders of a country.” GNP is “is the total market value of goods and services produced by the residents of a country, even if they’re living abroad. So if a U.S. resident earns money from an investment overseas, that value would be included in GNP (but not GDP).” While the distinction between the two is important because American firms are increasing the amount of business they do internationally, the actual difference between GNP and GDP is minimal as this chart from the St Louis Fed demonstrates:"

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