Stocks ARE Cheap And Anyone Who Says Otherwise Doesn’t Know What They’re Talking About


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.

For more on the compelling valuations now available, check out my previous posts on Cisco, DisneyCostcoGoogle , Microsoft, Walmart , Freeport McMoran, Dell, Apple and eBay.

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.

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