Two Articles Ask “Are Stocks Cheap?” And Reach Different Conclusions
“How low are P/E ratios? Valuations are low only if you have short memory”, Mark Hulbert, MarketWatch, October 23, 2008
Mark Hulbert writes that the S&P’s trailing P/E ratio on the last 12 months reported earnings is 18.1 – higher than 79% of months since 1871.
“Are US Stocks Cheap Yet?” (subscription required), The Wall Street Journal, October 27, 2008
An article in today’s Wall Street Journal, however, says that the S&P’s trailing P/E ratio on the last 12 months operating earnings is just over 13 – below the 10 year average of about 21.
Which is a better reflection of true earnings: reported or operating?
In this case, operating earnings, the metric used by The Wall Street Journal, is better because it excludes a $38.6 billion non-cash writedown of deferred tax assets by GM in the 3rd quarter of 2007 and a $29.7 billion non-cash writedown of goodwill assets on an acquisition by Sprint in the 4th quarter of 2007.
Those two huge writedowns seem to account for most of the discrepancy between the 18 trailing P/E used by Hulbert and the 13 used by The Wall Street Journal.