Raymond James Chief Investment Strategist Jeffrey Saut and colleagues Scott J. Brown and Andrew Adams put together the firm’s monthly market commentary titled “Gleanings”. In this month’s edition of Gleanings, published on July 9th, Saut begins by tooting his own horn. Saut highlights how he correctly called the bottom of the stock market in March of 2009, and that he also correctly identified the “valuation low” in October of 2011.
Jeffrey Saut: Secular bull market
Jeffrey Saut and colleagues go on to discuss the work of BMO analyst Brian Belski who is calling for a secular bull market that will last at least another decade. Saut goes on to say he also believes the current bull market has just begun to run, and point out that Belski’s analysis “agrees with what I have been saying in that there are years left to go on this secular bull market.”
The only fly in the ointment according to Jeffrey Saut is that we are currently entering a period of seasonal volatility, and that there is a good chance of a significant correction (could be up to 10%) in the next few months before the bull market cycle reasserts itself.
Jeffrey Saut: “Playing the odds”
In his analysis, Jeffrey Saut points out that investing in the stock market is just “playing the odds” based on historical data. He notes that the stock market has been up or flat 59 out of the last 85 years, just over 69% of the time. There are, of course, no guarantees, and any single year or even a decade can show negative returns, but long-term stock market investors are extremely likely to see significant profits.
Jeffrey Saut: Structural or secular bull markets
Jeffrey Saut goes on to highlight that the Dow Jones Industrial Average (INDEXDJX:.DJI) has seen eight structural/secular bull markets since 1896, and that each one lasted an average of 14 years.
He also takes on the argument that current price to earnings rations are too high. Saut notes that we are actually below historical P/E ranges, with stocks currently trading at 16.5 times this years earnings estimates and 14.3 times next year’s estimates. He goes on to include inflation in his calculations to create a 2015 S&P price target of around 2476 to 2545.
Saut has an interesting observation using the Ben Graham formula – Saut notes:
While Valuations are Not as Parsimonious as They Were at the Nominal and Valuation Low, Stocks are Not Expensive, Trading at 16.5x this Year’s Estimate ($119.45) and 14.3x Next Year’s Estimate ($137.59).
Moreover, a Case can be Made that P/Es Should Actually Expand Using the “Rule of 20,” Where the P/E Plus the Inflation Rate Should Equal 20 Implies a P/E Multiple of 18x 20 = 2% inflation rate + 18x P/E multiple
Benjamin Graham Observed That the Average Zero Growth Stock Sold at 8.5x Earnings and That P/E Ratios Increased at 2x Earnings Growth. Hence, Graham’s P/E Formula Where the P/E Should be 2x the Earnings Growth Rate (5% TTM) Plus 8.5 Also Suggests a P/E of About 18x (2x) 5% earnings growth + 8.5 = 18.5x P/E multiple
Using Either of Those Two Formulas Implies a 2015 Price Objective, Based on Next Year’s Bottom Up/Operating Earnings Estimate, of Somewhere Near 2500 on the S&P 500 (SPX/1975) 18-18.5 x $137.59 = 2015 S&P 500 Target: 2476.62 – 2545.42