Market Signals: S&P 500 Companies’ Valuation Multiples from 1/29/10

Chain Bridge Investing (“CB”) has decided to begin tracking the valuation multiples of S&P 500 companies in order to obtain another perspective regarding the current valuation status of the equity markets.  There is no intention to rely on these multiples alone, but over time they should allow for some interesting observations.  Last week’s multiples can be seen here.

One can easily argue that there is more to valuation than multiples, CB could not agree more and it would never use only one multiple or even three multiples to conclude valuation.   Furthermore, the multiples are not broken down by industry or sector and may mean more if they were broken down in such categories (may consider doing a sector breakdown moving forward). Yet, these multiples, especially overtime, may provide some insight into market psychology and expectations.  Part of the philosophy used at CB involves understanding the current state of the market and combining that insight with a primarily value-oriented approach.

At present, there are 156 companies with price/earnings (“p/e”) multiples exceeding 20x.  These  p/e ratios are  based on the latest 12-months of as-reported earnings.  Approximately a third of the S&P 500’s companies are currently considered over valued on an earnings basis.  Nevertheless, not included in the chart below are the number of companies that currently do not have positive earnings to report, which amounts to roughly 120 companies.

Regarding the price/free cash flow per share (“p/fcfps”) multiple, currently 147 companies are at multiples exceeding 20x,  thus approximately a third of the S&P 500’s companies are considered over valued on a free cash flow basis.  Yet, unlike the p/e multiple, there are many more companies with in the range of 1x to 10x, which could be considered cheap – or value stocks.

There are  152 companies with price/book (“p/b”) multiples exceeding  3x.  These multiples would also indicate a significant part of the market is over valued.

Lastly, there are  196 companies with price/tangible book (“p/tb”) multiples exceeding  3x.  These multiples would also indicate a significant part of the market is over valued.

According to these multiples, in general, the S&P 500 companies are certainly not cheap.  Is the market over valued?  At this time, it seems to be heading that direction.  Again, this information will probably become more useful as a time series is established.  Regardless of the state of the market, there are still values to be found as CB has discovered through other studies and research.  However, if there is a correction even value plays will most likely be pushed down.  CB urges caution, psychology, research, and risk management to protect investors’ capital.

All data is downloaded from Stock Investor Pro.  At time of writing, a CB member held a position in SDS.



Tagged with Market Valuation, S&P 500, S&P 500 Multiples, SDS, Valuation