Crestmont Research PE Reports

(Second Quarter 2012)
The stock market declined slightly over the past quarter. As a result, P/E decreased somewhat, yet remains within the range of “fairly-valued.” The reported P/E is distorted well below the normalized P/E due to currently high and unsustainable profit margins. The perception of low P/E valuation is likely providing support for the stock market. If the next downward leg in the business cycle is postponed for another year or longer, and if other economic and international headwinds remain contained, then the market could resurge toward new highs. At the same time, investors should remain cognizant of the risks confronting an increasingly vulnerable market.

(First Quarter 2012)
The stock market increased significantly over the past quarter. As a result, P/E has increased further into the range of “fairly-valued.” The reported P/E is distorted well below the normalized P/E due to currently high and unsustainable profit margins. The perception of low P/E valuation is likely providing support for the stock market. If the next downward leg in the business cycle is postponed for another year or longer, and if other economic and international headwinds remain contained, then the market could resurge toward new highs. At the same time, investors should remain cognizant of the risks confronting an increasingly vulnerable market.

(Fourth Quarter 2011)
As the result of a significant increase in the market over the past quarter, P/E has increased somewhat to approach “near fairly-valued.” The apparent P/E, based upon reported and expected future earnings, is likely providing support for the stock market. If the next downward leg in the business cycle is postponed for another year or longer, and if other economic and international headwinds remain contained, then the market could resurge toward new highs. At the same time, investors should remain cognizant of the risks confronting a vulnerable market.

(Third Quarter 2011)
P/E, as the result of a significant decline in the market over the past quarter, has decreased somewhat to be “slightly undervalued.” The momentum of the market has further stalled over the past quarter and current levels indicate that the stock market is either vulnerable to further cyclical downturn or likely to resurge toward new highs. Of particular note, reported EPS is well above the long-term baseline earnings trend. Therefore, reported P/E is distorted low and may continue to be further distorted over the next year or two until a decline in reported earnings causes EPS to fall below the baseline.

(Second Quarter 2011)
P/E, as the result of a near flat market over the past quarter, has decreased minimally and remains “near fairly-valued.” The momentum of the market has stalled somewhat over the past quarter and current levels indicate that the stock market is vulnerable over the next year or two to another cyclical downturn. Of particular note, reported EPS is well above the long-term baseline earnings trend. Therefore, reported P/E is distorted low and may continue to be further distorted over the next year or two until a decline in reported earnings causes EPS to fall below the baseline.

(First Quarter 2011)
P/E, as the result of market gains in excess of underlying economic and earnings growth, has increased further into the normalized valuation range and remains “near fairly-valued.” The momentum of the market remains upward (note that cyclical trends tend to over-shoot fair value), but current levels indicate that the stock market is vulnerable over the next year or two to another cyclical downturn. Of particular note, reported EPS is well above the long-term baseline earnings trend. Therefore, reported P/E is distorted low and is likely to continue to be further distorted over the next year or two until a decline in reported earnings causes EPS to fall below the baseline.

(Year-End 2010)
P/E, as the result of the market surge, is near the middle of the normalized valuation range and is now ‘near fairly-valued’. The momentum of the market remains upward (note that cyclical trends tend to over-shoot fair value), but current levels indicate that the stock market is becoming vulnerable over the next year or two to another cyclical downturn. Of particular note, reported EPS is again above the long-term baseline earnings trend. Therefore, reported P/E is distorted low and is likely to continue to be further distorted over the next year or two until a decline in reported earnings causes EPS to fall below the baseline.

(Third Quarter-End 2010)
P/E returned to the lower half of the normalized valuation range and is now ‘slightly undervalued’; the stock market remains positioned for above-average returns over the next year or two (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation). Notwithstanding the overall trend, remain aware that typical market volatility makes it likely that the recent significant short-term swings and market corrections may continue. Of particular note, reported EPS again is above the long-term baseline earnings trend. Therefore, reported P/E is distorted low and is likely to continue to be further distorted over the next year or two.

(Second Quarter-End 2010)
P/E has dipped to or just below the normalized valuation range and is now ‘somewhat undervalued’; the stock market remains positioned for above-average returns over the next year or two (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation). Notwithstanding the overall trend, remain aware that typical market volatility makes it likely that the recent significant short-term swings and market corrections may continue or occur again later this year.

(First Quarter-End 2010)
P/E remains ‘slightly undervalued’ in the lower half of the normalized valuation range; the stock market remains positioned for nearer-term above-average returns (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation). Notwithstanding the nearer-term trend, remain aware that typical market volatility makes it increasingly likely that the market will experience significant short-term swings—recent market volatility has been unusually low.

(Year-End 2009)
P/E remains ‘slightly undervalued’ toward the lower end of the normalized valuation range; the stock market remains positioned for nearer-term above-average returns (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation). Notwithstanding the nearer-term trend, remain aware that typical market volatility makes it increasingly likely that the market will experience significant short-term swings. The ‘Reported’ measure of EPS and P/E, reflecting the most recent four quarters, continues to become less distorted as earnings recover from the recession.

(Late Fourth Quarter 2009)
P/E, despite recent market gains, remains ‘slightly undervalued’; the stock market remains positioned for nearer-term above-average returns (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation). Notwithstanding the nearer-term trend, remain aware that typical market volatility makes it likely that the market will experience significant short-term swings.

(Third Quarter-End 2009)
P/E, despite recent market gains, is ‘slightly undervalued’; the stock market remains positioned for nearer-term above-average returns (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation). Notwithstanding the nearer-term trend, remain aware that typical market volatility makes it likely that the market will experience significant short-term swings.

(Early Third Quarter 2009)
P/E, despite recent market gains, remains ‘somewhat undervalued’; the stock market remains positioned for nearer-term above-average returns (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation).

(Mid Second Quarter 2009)
The P/E has returned to near year-end 2008 levels and is ‘somewhat undervalued’; the stock market remains positioned for nearer-term above-average returns (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation).

(Mid First Quarter 2009)
The 18.6% year-to-date decline has returned P/E to fairly undervalued (from ‘somewhat undervalued’) and has positioned the market for nearer-term above-average returns
(assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation).

(Year-End 2008)
Despite a modest recovery in the stock market since the most recent report, P/E remains somewhat undervalued and positioned for nearer-term above-average returns (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation).

(Mid Fourth Quarter 2008-II)
The declines in the stock market that have continued during the fourth quarter have been significant enough to further change the status: P/E is now fairly undervalued and positioned for nearer-term above average returns (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation).

(Mid Fourth Quarter 2008)
The declines in the stock market during October have been significant enough to change the status: P/E is now relatively undervalued and positioned for nearer-term above average returns (assuming that the economy is not expected to enter a multi-year period of significant deflation or relatively high inflation).

(Late Third Quarter 2008)
The reported price/earnings ratio (“P/E”) in recent years was distorted downward due to an interim peak in the earnings cycle. The reported P/E ratio has been restored to near normalized levels as the result of the reversion of earnings to near long-term trend levels. The normalized P/E is relatively-high in relation to historical averages, a reflection of relatively-low expected inflation (and long-term interest rates). But, P/E is now highly-vulnerable to decline due to expectations by some toward higher inflation and by others toward potential deflation. Low, stable inflation is required to sustain P/Es at or above 20.