The U.S. stock market has performed well over the last five years. That certainly isn’t a bad thing if the rise coincides with an increase in the underlying fundamentals. However, in my opinion, share prices seem to be accelerating away from what I consider to be reasonable valuations.
Even with the overall market climbing to ever higher levels, there have historically been sectors that lag behind and offer the traditional value buy opportunity. In 2014, that’s tougher because many sectors are marching in unison up to new highs.
As a general yardstick for valuations, I’m going to use the multiplier of price-to-earnings multiplied by price-to-book value (PEPB). For my purposes, these valuations are generally only based on the top 20 or so holdings (weighted by market cap) in a sector, but they still provide at least a general guideline as to value.
At current prices, not a single sector is trading below its respective 10-year average PEPB value. The tech sector has a current PEPB of around 93, which is only around 20% higher than its 10-year average of 78.
Even being only marginally over its average, that high PEPB ratio doesn’t lend itself well to “value” type of purchases. Furthermore, the recent past has provided opportunities to buy into that sector at more reasonable PEPB value of 56 (Sept, 2011), 55 (Sept, 2010), or even 46 (March, 2009).
While there is always the chance that earnings and book values will rise to catch up with current valuations, the current prices pose too much potential risk for capital loss in my opinion.
The market tends to swing from one extreme to the next and using history as a guide, it will only be a matter of time in my opinion before one or more sectors are again trading at more reasonable or even bargain prices. While the broad market and many sectors appear to be overpriced, there are still individual stocks trading at reasonable valuations.
DISCLAIMER: The investments discussed are held in client accounts as of June 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
