“Never let a good crisis go to waste!” Winston Churchill once said.
Churchilll might not have foreseen that his advice would be so widely adopted among stock investors these days. It is indeed true that crises can bring up opportunities, which, in the stock market, could mean attractive prices.
However, will this really turning out to be the case in this oddly-behaving bear market Investors started to feel significant anxiety back in March triggered by the pandemic crisis. The market dropped rapidly before climbing back up nearly as fast.
Even in those “darkest” days of March, stocks in general appeared not to be cheap at all, as we described in a previous GuruFocus article. Warren Buffett (Trades, Portfolio) did not play bottom fishing this time as he did in previous bear markets, citing the difficulty in finding anything attractive.
At the same time, some fund managers did take advantage of the downturn. For example, Terry Smith scooped up two hard-hit quality names from his watch list, Nike (NKE, Financial) and Starbucks (SBUX, Financial). However, he disposed of Clorox (CLX, Financial) due to the valuation concern in the meantime.
Also, we have observed that the market quickly reversed any trend towards value opportunities in April, and it now stands at the level not far from its all-time high. We cannot predict the direction of future market movement, but we certainly know that stocks are more expensive now than they were two months ago.
Per data from GuruFocus, the Buffett Indicator, called thus because it is Buffett's favorite indicator of total market valuation, has a current reading of 143% for the U.S. market, indicating a “significant overvaluation.” The Shiller price-earnings ratio (currently 28.6) is nearly 70% higher than its historical mean (17). The regular price-earnings ratio (21.8) is 35% higher compared to a historical average of 16.1.
Corporate insiders seem to agree that markets are overvalued, as they turned from net buying in March to net selling in April and May (see below).
Moreover, stock pickers did not lose their appetite for paying more for quality businesses during this crisis. For instance, Hermes International (XPAR:RMS, Financial), the century-old French heritage luxury brand, trades with a free cash flow yield of almost 2% at the moment. Even at the very market bottom in March, the yield was not able to reach 3%. You may find similarly rich pricing for other stocks on our wish list.
Looking outside of the States, we notice the most attractive valuations in Singapore, China, Russia and Turkey, as measured with the Buffett Indicator. However, it seems challenging for U.S. nvestors to find high quality stocks in these markets.
Despite the expensive stock market, interest rates are near record lows around the globe while government debt continues to pile up. If such situations persist, it looks reasonable to us for investors to lower their expectations of equity returns going forward.
In light of all of this, should we "waste" this crisis? To us at Urbem, the answer appears to be “yes” for now.
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 and Hermes International.
Read more here:
- Lessons on When to Sell From Terry Smith
- A First Look at TechnoPro
- What We Learned From Sold Positions at Polen Capital
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