A Market of Stocks? Distribution of S&P 500 P/E Multiples Tightest In 25 Years

A Market of Stocks? Distribution of S&P 500 P/E Multiples Tightest In 25 Years

By greenbackd

Great piece from Tocqueville Funds’ François Sicart called Contrarian Investing in a Liquidity-Driven Environment. Tocqueville is a “bottom-up” value investor:

Individual stock selection prevails over macro opinions, be they about the economy or the markets.

Dan Sundheim Founder Of D1 At Sohn 2021 On His Favorite Stock

Jeffrey Aronson Crossroads CapitalAt this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More

This approach generally has been vindicated in the past, as value investors tended to outperform a majority of money managers over full market cycles; and this outperformance has been achieved principally during bear markets, by losing less than most.  The reason, I believe, is so obvious as to sound simplistic:  When a stock is selling close to the “intrinsic” value of its underlying company’s shares, it does not have to travel down very much to find a floor.

Good logic, but it didn’t protect Tocqueville of anyone else in 2007 to 2009:

In spite of this “unquestionable” logic, the great majority of portfolios (including those of some iconic value investors) were engulfed in the panicky downward spiral that followed the Lehman Bros. failure, between the summer of 2008 and the final bottom, in early 2009.

That part of the overall 53-percent decline from the 2007 top to the 2009 bottom was generally indiscriminate – more so than I can remember throughout my career, with the possible exception of the one-day crash of 1987; but that violent but brief market episode did not trigger a global financial crisis or recession.

“But it’s a market of stocks”:

At this stage of a discussion, a broker would typically tell you, “This is not a stock market, but a market of stocks,” implying that there are always attractive investments somewhere, even when the overall market seems overpriced.  And although this is a typical sales pitch, they usually are correct.  This time, however, we may have to work harder to find those attractive investments.

Market of Stocks

David Kostin, Goldman Sachs’ chief U.S. equity strategist, explained that investor demand for “value” has been so pervasive that low-valuation stocks had outperformed higher valuation peers by 12 percent in 2013.  As a result, the distribution of S&P 500 P/E multiples was now its tightest in at least 25 years, implying less differentiation of companies based on valuation.

“With valuation clustered together, we believe there are attractive relative value opportunities where companies with different fundamentals are trading at very similar valuation levels.”

If you’re having trouble finding undervalued stocks, this is some indication that it’s not just you. The current valuation spread is narrower than it was in 2007, and stands in stark contrast to the early 2000s when it was wider than usual.

Read Tocqueville Funds’ Contrarian Investing in a Liquidity-Driven Environment.

Order Quantitative Value from Wiley Finance, Amazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

Previous article Could Future Apple iPhones Be Produced By Robots?
Next article PEG Ratio versus the P/E Ratio
My name is Tobias Carlisle. I am the founder and managing member of Eyquem Investment Management LLC, and portfolio manager of Eyquem Fund LP. Eyquem Fund LP pursues a deep value, contrarian, Grahamite investment strategy based on the research featured in Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (hardcover, 288 pages, Wiley Finance, December 26, 2012), and discussed on Greenbackd. I have extensive experience in activist investment, company valuation, public company corporate governance, and mergers and acquisitions law. Prior to founding Eyquem, I was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions I have advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam, ranging in value from $50 million to $2.5 billion. I am a graduate of the University of Queensland in Australia with degrees in law and business (management). Contact me I can be contacted at greenbackd [at] gmail [dot] com. I welcome all feedback. Connect on LinkedIn, where we’re Friends.

No posts to display