PER de largo plazo

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Dalamar
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PER de largo plazo

Mensajepor Dalamar » 03 Oct 2012 07:52

Visto en http://www.crestmontresearch.com:

AS OF: SEP 30, 2012 P/E
Price/Earnings Ratio 20.8

By historical standards, the higher levels of P/E in 2007 (~25x) were near the upper limit of “fairly-valued.” One implication could be that the current level of P/E has room to grow. Yet for investors that now foresee a greater risk of slower economic growth and/or a higher inflation rate or deflation in the future, the upper bound for P/E fair-value would be much lower than historically warranted.

Further, note that the reported P/E increased this quarter not only due to the market rally, but also as a result of a decline in earnings. The reported P/E remains distorted below the normalized P/E due to currently high and unsustainable profit margins.

Historically, the valuation level of the stock market has cycled from levels below 10 times earnings to levels above 20 times earnings. Except for bubble periods, the P/E tends to peak near 25.

What drives the P/E cycle? The answer is the inflation rate—the loss of purchasing power of money and capital. During periods of higher inflation, investors want a higher rate of return to compensate for inflation. To get a higher rate of return from stocks, investors pay a lower price for the future earnings (i.e. lower P/Es). Therefore, higher inflation leads to lower P/Es and declining inflation leads to higher P/Es.

The peak for P/E generally occurs at very low and stable rates of inflation. When inflation falls into deflation, earnings (the denominator for P/E) begins to decline on a reported basis. At that point, with future earnings expected to decline from deflation, the value of stocks declines in response to reduced future earnings—thus, P/Es also decline under deflation.

Rising inflation or deflation causes the P/E ratio to decline over an extended period which in turn creates a secular bear market. From periods of higher inflation or deflation, the return of inflation to a lower level causes the P/E ratio to increase over an extended period thereby creating a secular bull market.

The secular analysis for each year relates to the average index across the year; so for each year, the price (P) in P/E (price/earnings ratio) is the average index for all days of the year. The stock market has recovered most of its declines from late 2008 and early 2009; therefore, it’s now fairly clear that the period in late 2008 and early 2009 was just a cyclical (short-term) bear market blip within a longer secular bear market. Of course, that makes the last four years a typical cyclical bull market inside a secular bear market (it has happened many times before).

Note that the average reported P/E from 1900 to 2011, unadjusted for the business cycle and adjusted for the late 1990s bubble, is 14.
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Dalamar
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Re: PER de largo plazo

Mensajepor Dalamar » 03 Oct 2012 08:06

It is important to ensure relevant comparisons—that is, P/Es that are based upon trailing reported net earnings should only be compared to the historical average of 14. When ten years of real net earnings are used in P/E (i.e., Shiller P/E10), the relevant average is 15.5.

Too often, writers and analysts compare a P/E that is based upon forecast operating earnings to the average for trailing reported net earnings. Although long-term forward operating earnings data is not available, the appropriate P/E for that comparison would be closer to 11.

Yet the most significant distortion from quarter-to-quarter or year-to-year is due to the earnings cycle, or as some refer to it, the business cycle.

About every five years or so, the reported P/E will reflect the opposite signal rather than a more rational view of P/E valuations. For example, the reported value for P/E in early 2003 reflected a fairly high value of 32 just as the S&P 500 Index had plunged to 800 (E had cycled to a trough of $25 per share). A P/E of 32 generally screams “sell” to most investment professionals; yet, in early 2003, that was a false signal! A more rational view using one of the business cycle-adjusted methods reflected a more modest 18. In a relatively low inflation and low interest rate environment, the scream should have been “Buy”…

Several years later, in 2006 (after an unusually-strong run in earnings growth), E peaked at $82 per share as the S&P 500 Index was hesitating at 1500. Most market pundits were recommending a strong “buy” due to a calculated P/E of only 17. Yet, using the rational business cycle-adjusted methodologies, the true message was “STOP”—P/Es were saying sell, with P/E more than 25.

So when investors’ stock market accounts were down almost 50%, they were handed explanations that the earnings decline was unexpected and the fault of the financial sector…

To adjust for the variability of earnings across business cycles, a rational methodology is needed to reduce distortions and provide a normalized reading about the long-term level and trend in earnings. The most recognized methodology is the one popularized by Robert Shiller (Yale) in Irrational Exuberance and on his website. To smooth the ups and downs in earnings, his methodology creates an average of the reported earnings for the past ten years. To eliminate the effect of inflation, all earnings values are adjusted-forward and increased by the impact of inflation. The result is a ten-year average for E. Using the current stock market index value, we have a more rational view of the current P/E valuation of the stock market.
For historical values, whether it relates to a month or a year in the past, Shiller also adjusts the stock index value by averaging the closing price for each day during the period. The stock index adjustment reduces historical distortions caused by significant intra-period swings by the market.

Crestmont has developed a complementary methodology—one that is fundamentally-based—that produces similar results, yet also provides forward-looking insights. The approach is explained further in Chapter 7 of Unexpected Returns, yet in summary, it uses the close and fundamental (not coincidental) relationship between earnings per share (“E”) and gross domestic product (GDP) to adjust for the business cycles. The baseline E for each period essentially is based upon mid-point values for E across the business cycle—peak and trough periods of actual earnings reports are adjusted back to the underlying trend line to reduce the intra-cycle distortions.

CONCLUSION

Today’s P/E is approximately 20.8; the stock market remains in secular bear market territory—close to the mid-range of fair value assuming a relatively low inflation and low interest rate environment. It is historically consistent for secular bear markets to present shorter-term periods of strong returns (cyclical bull markets) followed by periods of market declines (cyclical bear markets).

The only way to reposition into a secular bull market is to experience a decline in the stock market due to significant inflation or deflation. This can occur either by a significant decline over a short period of time (e.g. the early 1930s secular bear market) or by minimal decline over a longer period of time (e.g. the 1960s-1970s secular bear market).

book Probable Outcomes: Secular Stock Market Insights provides greater detail about normalizing EPS and P/E than was presented in Unexpected Returns. Probable Outcomes was written to answer two recently popular questions. First, is this secular bear market almost over? Second, what are the likely returns from the stock market over the decade of the 2010s?

For more details, please visit www.ProbableOutcomes.com.
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