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Video- Shiller P/E for Stocks: The True Measure of Stock Valuation

Charlie Tian looks at the valuation of Moody's

March 31, 2020 | About:

Hi fellow investors,

In my previous videos, I mentioned that the Shiller P/E can be used for mirroring the overall market valuation. It can also be used to mirror the sector valuation. The Shiller P/E is a better mirror of valuation lots of times and it can also be used for individual stocks.

Once we go to GuruFocus.com, I will look at Moody’s (NYSE:MCO). On the main page for Moody’s, you will see the rank for financial strength. It will have the rank for profitability and it will also have the rank for valuation.

Under valuation, you will see the rank for Shiller P/E. If you click on that link, you will see a page that tells you how Shiller P/E was calculated. Again, Shiller P/E is calculated by normalizing the past earnings to current, then dividing by the stock price.

We want to compare how the Shiller P/E compares with the regular price-earnings ratio, especially historically. Looking at the interactive chart, you will initially see the stock price listed. You can add on a line for the regular P/E ratio. You can see that in 2017, the regular P/E ratio was very high. In this case, it seems like the stock is very expensive, but in reality it is not that expensive.

Adding on a line for Shiller P/E allows you to compare the two directly on the chart. Looking at the Shiller P/E ratio line, you can see that the stock is actually not that high comparatively. That big spike in 2017 on the regular P/E is caused by Moody’s having some bad years in earnings and is misleading.

According to the Shiller P/E valuation, buying Moody’s in 2017 actually was not overly expensive. If you had purchased at that time,, you would have outperformed the market and seen dramatic returns on your investment. So this shows a clear example of why you would want to use Shiller P/E for individual stocks.

Feel free to try it out for other companies and see how it can work for you. Again, if you have any questions or comments, please leave them in the comment section below and I will answer them as soon as possible.

See you next time,

Charlie Tian

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About the author:

Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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