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 is Warren 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 (MA, Financial) | 36.94x | 20.44x | 28.18x |
| Rollins (ROL, Financial) | 43.93x | 16.19x | 30.19x |
| Brown-Forman (BF.B, Financial) | 42.02x | 13.51x | 36.96x |
| Estee Lauder (EL, Financial) | 36.01x | 11.19x | 28.72x |
| Intuitive Surgical (ISRG, Financial) | 48.01x | 18.88x | 31.98x |
| Church & Dwight (CHD, Financial) | 20.18x | 14x | 20.47x |
| Intuit (INTU, Financial) | 31.74x | 13.77x | 20.4x |
| Nike (NKE, Financial) | 35.99x | 15.02x | 29.67x |
| MarketAxess (MKTX, Financial) | 56.35x | 9.18x | 32.82x |
| Graco (GGG, Financial) | 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 Buffett Indicator. 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 Buffett Indicator 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.
Read more here:
- A Quick and Dirty Approach to Valuing a Business
- Three Quick Moaty Picks From Southeast Asia
- Urbem's 'Wonderful Business' Series: KONE
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