ModernGraham

The Mental State of Mr. Market – April 2015

Market State (8)Legendary value investor Benjamin Graham is probably most famous for his Mr. Market parable.  In the story, an investor is greeted each day by Mr. Market, who offers to purchase the investor’s stocks.  Every offer is different, and sometimes the price is insanely high, sometimes it seems fair, and other times it is clearly too low.  But one thing remains the same – the intrinsic value of the investments does not change.  As a result, the investor is left to decide when to buy and sell based on the relationship between the intrinsic value and the price Mr. Market is offering.

All value investors today should keep the analogy in mind, and implement the overall concept.  To assist in that goal, ModernGraham has various tools available, and the infographic shown above is one of them, displaying a summary of the valuations of 505 companies reviewed by ModernGraham.  Each valuation can be found in the Valuation Index, available for free, or premium members can access more detailed information including screens and tables of the valuations.

This month, out of the 505 companies reviewed by ModernGraham, the average PEmg ratio (price over normalized earnings) is 25.64 and the average company is trading at 86.18% of its intrinsic value.  Last month, the average PEmg ratio was also 25.79 and the average company was trading at 88.03% of its intrinsic value.

The highest PEmg average we have seen while tracking this information was 26.17 in December 2014 while the lowest PEmg average was 24.29 in October 2014.  The highest average intrinsic value was 93.48% in January 2015 and the lowest average intrinsic value was 86.18% in April 2015.

Month Average PEmg Average % of value Defensive % Enterprising % Speculative % Undervalued % Fairly Valued % Overvalued %
August 2014 24.36 90.57% n/a n/a n/a n/a n/a n/a
September 2014 25.37 93.37% n/a n/a n/a n/a n/a n/a
October 2014 24.29 90.24% 12% 35% 53% 31% 21% 48%
November 2014 25.32 90.61% 12% 35% 53% 29% 21% 50%
December 2014 26.17 92.28% 11% 34% 55% 28% 23% 49%
January 2015 25.63 93.48% 10% 34% 55% 30% 20% 50%
February 2015 25.79 92.72% 10% 35% 55% 33% 19% 49%
March 2015 25.79 88.03% 10% 35% 55% 31% 19% 49%
April 2015 25.64 86.18% 9.9% 35.2% 54.9% 32.1% 19.4% 48.5%

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One response to “The Mental State of Mr. Market – April 2015”

  1. Andrei Avatar
    Andrei

    Hi!

    First of, I’d like to say that this is a great tool and it can certainly be extremely helpful to track sectors & industries & individuals tickers month over month. For any investor (value oriented especially) these types of tools are a necessity and ideally each investor should have a tool or dashboard of their own based on the investing strategy they employ.

    That said, I’d like to raise a concern about the market valuations displayed here on the basis of the Graham model for calculating (one should really say estimating) the intrinsic value of a company. While ideally the 15% growth rate cap used in the model might hold true/be applicable for say the beginning/middle stages of a bull market, the same cannot be said for a late stage bull market (which we may or may not be entering now).

    Interest rates will be rising – historically that means a contraction of P/E ratios (so share prices will go down). Global growth is slowing down – a lot of rebalancing and devaluation of major currencies is happening world-wide. Investors should be wary of these factors, and, (presuming the above market state is based off of the valuation model displayed on this site) should question the “intrinsic value” of given tickers/companies. I would argue the model is being too “bullish” and should have the 15% growth rate cap adjusted in expectation of a late stage bull market.

    One final point to add – if you were to go peruse Gurufocus (or any other site that tracks a ticker’s financials over a ten year period) you would note that many companies in the most recent quarter had taken on more debt while experiencing a fall on return on equity (warning sign!). Furthermore, many companies experienced a decrease in free cash flow while utilizing the said “extra” debt to buy back their own shares (thus inflating their earnings per share!) Now, this may be because they expect rising interest rates going forward and wish to lock down the 0% rates, but on the other hand, why not use the “extra” debt to expand their businesses (buy more equipment/etc) instead of buying back their own shares? Financial engineering at best. Be wary of buying highly leveraged stocks that are becoming more leveraged when higher interest rates are in sight (especially if they’re not using the “extra” debt meaningfully and just wasting it on propping up their own company’s share price.)

    Reply

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