One of the arguments that really annoys me these days is when somebody claims that even after the 50% decline in the major indexes stocks aren’t cheap. The argument usually posits some estimate of 2009 S&P earnings, puts a multiple on that and says “See, stocks aren’t even cheap”. For example, some analysts are calling for $50 in earnings for the S&P 500 this year. A 12 multiple on that would give a fair value of 600.
But everytime I analyze individual stocks, I’m impressed by the value now available. I wonder if there is a problem with looking at overall S&P earnings since the financials are going to continue to get crushed in 2009. I wonder what the forward expected P/E ratio would be on the S&P – excluding financials. My guess is it would show substantial value.
Let’s consider a couple stocks I’ve looked at in the last few days.
Hewlett Packard (HPQ) reported a tough 1st quarter last week. But they are still forecasting earnings for Fiscal 2009 between $3.76-$3.88. The stock is currently trading for $29.50. That’s a 7.7 forward multiple. Is that expensive? No, it’s very cheap.
Adobe Systems (ADBE) is another example of a cheap tech stock. They have $3 a share in net cash and short term investments on the books so you get the business for $14. They earned $2.08 last year and analyts are forecasting $1.78 this year. That’s a 7.9 forward multiple. Is that expensive????
Pfizer (PFE) is another example. The stock is trading for $13 and change with $1 and change in net cash and short term investments on the books. They earned $2.42 last year. They’re forecasting $1.85-$1.95 this year – part of which is due to an increase in their expected tax rate from 22% to 30% due to the Wyeth acquisition. $2 is probably a fair number. That’s a 6 forward multiple after you back out net cash and short term investments. You want to tell me that that is expensive? Take a hike.
There are some expensive stocks out there. A few that I’m aware of are: Amazon (AMZN), Netflix (NFLX) and Apollo Group (APOL).
But for the most part what I’m seeing is exceptional value.
Disclosure: Top Gun is long Adobe (ADBE), Pfizer (PFE), Costco (COST), Walmart (WMT) and eBay (EBAY) and has no position in any other stocks mentioned in this article.