The stock market recovered most of its January losses in February. Oil prices has also recovered more than 50% from its lows without being noticed. With this, we would like to review our model portfolio performances and the market valuations.
GuruFocus Value Strategies Performance Review
GuruFocus Value Strategies performed well again in the challenging market. As of today, all the Value Strategies delivered positive returns. You can see the performances of the model portfolios here. GuruFocus Top 25 Historical Low P/S Ratio Companies gained close to 9% YTD, which 18 out of the 25 stocks generating positive returns YTD. Only three out of the 25 stocks underperformed the market. You can see the current list of Top Ranked historical Low P/S Companies here.
Top 25 Undervalued Predictable Companies portfolio gained 4% YTD. Since inception in 2009, it has outperformed the market by wide margins. The stocks in the portfolio also did well this year. also 18 out of the 25 stocks are generated positive returns this year. You can find the current list of Top Ranked Undervalued Predictable Companies here.
Guru Most Broadly Owned Portfolio, which outperformed S&P 500 9 out of the last 10 years, has underperformed slightly this year. You can see Guru Aggregated Portfolio here.
If you want to invest in this portfolio, please look at this DIY guide.
Market Valuations as Measured by the Buffett Indicator
The most important indicator of the stock market valuation is what we called Buffett-indicator. It is the ratio of total market cap over GNP. As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”
This the historical value of the ratio:
As of today, the ratio is standing at 112.8%, down from 114.3% at the beginning of January. If we assume the ratio will revert to the mean in 8 years, the market will average 1.1% of return over the next 8 years, including dividends.
This seems very pessimistic. But the ratio has been quite accurate in predicting long term market returns, as indicated in the chart below:
The blue line in the above chart is the prediction based on the ratio of Total Market Cap over GNP will be it is historical mean in 8 years, while the red line is the extreme optimistic case, which gives a potential return of 6.39% a year over the next 8 years. The green line is the pessimistic case, which gives an return of -6.5% a year over the next years. The yellow line is the actually return, which has pretty good agreement with the blue line.
For more details of Buffett indicator and how we arrived at these numbers, please visitor Where Are We with Market Valuations?
Shiller P/E Ratio and Its Predictions
Shiller P/E, named after its invention Prof. Robert Shiller of Yale University, is another more objective measurement of the market valuation. As of today, it sits at 25, down from 25.3 at the beginning of January, which is about 49.7% higher than the historical mean of 16.7.
This is the historical value of Shiller P/E:
Shiller P/E certainly indicates that the market is wildly overvalued. Historically only three periods the ratio was higher, the bubble of 1929, the tech bubble of 1999 and the financial bubble of 2007. The regular P/E is 22, which is also much higher the historical mean of 15.9.
We can use the similar revert to the mean methodology to calculate potential market returns. At today’s Shiller P/E, the market is likely to return 0.3% a year over the next 8 years, which is similar to the conclusion we reached from the Buffett indicator.
To learn more about Shiller P/E, please go here.
Insider Trends
Insider trends ars a great indicator of what insiders are thinking about the valuations. You can learn more about insider trends here.
In March, insiders are not as bullish as they were back in December, although the stock prices are lower.
Sector/Industry Valuation
The poor performance of energy sector has driven the valuation of energy companies to the lowest in market, as shown in GuruFocus page of Industry Overview. The median P/E of the sector has since recovered to7.9 for oil & gas drillers, and 11 for E&P companies.
You can see the sector/industry valuation distribution in GuruFocus page of Industry Overview: Valuation, Dividend Yield, Growth and Profitability
Junk Bond Yield Keeps Rising
There are warning signs in the bond market. But the yield has since eased to 18.95. The yield is close its highest level in 6 years. Since 1997, there were only two occasions that had higher junk bond yields, and both were associated with recessions. This is something investors should keep an eye on. For historical yields, please look at the chart below:
