On Friday, Berkshire Hathaway Inc. BRK.ABRK.B CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator reached 140.3%, approximately 6% higher than its Feb. 1 reading of 134.3% and 16.7% higher than its Jan. 2 reading of 123.6%.
Dow escalates sharply over past two months
Although the Dow Jones Industrial Average briefly exceeded 26,100 in morning trading, it closed at 26,028.76, down 103.59 points from the intraday high of 26,132.35 but 112.76 points from Feb. 28’s close of 25,916. Despite this, the index has increased approximately 3,346.54 points since its year-to-date low of 22,682.22 on Jan. 3. Likewise, Buffett’s top holding, Apple Inc. AAPL, closed at $174.97, up approximately 23.05% from its year-to-date low of $142.19.
CNBC columnist Fred Imbert listed several reasons for the strong market increase over the past two months, including decreasing trade tensions between China and the U.S. and declining fears of tighter monetary policy from the Federal Reserve. Despite this, the Dow pared early gains on lower-than-expected consumer sentiment data.
Stock market becomes more overvalued
As the Dow escalates, the U.S. market becomes more overvalued: the ratio of total market cap to gross domestic project stands at 140.3%, approximately 25% higher than the “significant overvaluation” threshold of 115%. Based on this market valuation level, the projected return of the U.S. market is approximately -1.8% per year over the next eight years. Figure 1 illustrates the historical trend of the Wilshire 5000 full-cap index and the U.S. GDP.
Figure 1
According to the predefined and actual returns chart, the expected return of the U.S. market ranges from -9.50% in the most-pessimistic case to 3.10% in the most-optimistic case. The green, blue and red lines in Figure 2 indicates the projected returns if the Buffett indicator averages 40%, 80% and 120% over the next eight years.
Figure 2
Value screeners continue identifying investing opportunities
GuruFocus has launched new versions of each of the most popular screens, which include the Ben Graham Net-Net Screen, the Undervalued Predictable Screen and the Buffett-Munger Screen. Table 1 lists the value screener record as of March 1.
| Screener | USA | Canada | UK | Europe | Asia | Oceania | Latin America | Africa | India |
| Graham Net-Net | 275 | 64 | 51 | 276 | 606 | 11 | 5 | 13 | 77 |
| Undervalued Predictable | 63 | 6 | 33 | 81 | 58 | 5 | 28 | 8 | 7 |
| Buffett-Munger | 39 | 5 | 15 | 48 | 70 | 0 | 18 | 4 | 29 |
| Peter Lynch PE | 32 | 2 | 14 | 39 | 57 | 0 | 4 | 3 | 5 |
| Peter Lynch PS | 118 | 8 | 51 | 113 | 95 | 8 | 35 | 24 | 20 |
| Peter Lynch PB | 161 | 22 | 65 | 148 | 106 | 8 | 36 | 22 | 38 |
| Lynch p2ebitda | 191 | 7 | 57 | 189 | 120 | 7 | 11 | 17 | 26 |
| Hist Low PS | 43 | 2 | 20 | 41 | 77 | 0 | 15 | 6 | 15 |
| Hist Low PB | 50 | 2 | 21 | 44 | 81 | 2 | 20 | 9 | 13 |
| High Div Yield | 73 | 7 | 11 | 102 | 22 | 12 | 16 | 12 | 4 |
Table 1
See also
Buffett included a reference to a “forest of trees” in his 2019 shareholder letter to underscore the importance of owning a diverse basket of companies. The “Oracle of Omaha” also said he views his holdings as “an assembly of companies [Berkshire] partly owns.” Buffett also mentioned his stocks are returning at least 20% on tangible equity and generating profits “without employing excessive levels of debt,” some key criteria in Berkshire’s four-criterion investing approach. As of year-end 2018, Berkshire’s equity portfolio has high exposure to the financial services, technology and consumer staples sectors. The conglomerate’s top six holdings are Apple, Bank of America Corp. BAC, Wells Fargo & Co. WFC, The Coca-Cola Co. KO, American Express Co. AXP and The Kraft Heinz Co. KHC.
Disclosure: No positions.
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