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I am using the SMA(200) weekly as my Buy point target. Note in 2008/2009 S&P sell off it was well below the SMA(200) weekly by almost 45%. That will put the $SPX around 1770 or about 110 S&P points which is about 990 DOW points lower from the current closing levels..
That seems to be a winning strategy so far. Not buying now based on waiting for your SMA target price is a tactic that beats my results so far of making many small buys as the market falls.
• Forward P/E: Probably the most common measurement, it divides the current S&P 500 price by 12-month forward expected operating earnings. It is presently slightly above its ~20-year median of 15.9.• T
I don't know where buying will come in. My guess, maybe at S&P 15x forward earnings (assuming those earnings actually occur). That'd make the S&P at 118.5x15= 1778. That's comparable to the number you're using (1770) as a buy point target. 1880-1770=110. So maybe another 6% drop in S&P and other stocks.
On the one hand, that 15 p/e wouldn't historically mean that stocks are cheap, only somewhat below the median average, i.e. "reasonable", as you've said. Otoh, I believe with interest rates so low, we should expect stocks to be valued at a higher p/e than otherwise. I mean bonds offer safety, but not much yield, so as an asset class for money-making, stocks should pull us in. Also, the S&P is dominated by AAPL, GOOG, MSFT, XOM, WFC, JNJ, FB, GE, JPM, AMZN, WMT, PG, etc. There are so many mid-cap and small cap stocks though that have already fallen 20% from highs and/or that sell at relatively low p/e's (or other metrics) that I find them attractive at current prices (unfortunately also when they were at higher prices too--g-).
You are right, the S&P mean value range is just a target point but different sectors are/will become buys now or very soon. The Oil & energy sectors are well into that value area but who wants those stocks now.
I was looking at DIS and the buy point there using the SMA (200) weekly is at/near $76.00/share. Probably still 26% more possible downside. So the key is to also look at sectors during the sell off.
I also use the GN (Graham No.) calculator to provide me some measure of where fair value is. It uses past 10 years of earnings and stated BV. I suspect forward earnings may/could be a bit less if we have a mild recession, so GN values may not rise much in the short term
I am also looking at small caps that continue to grow and also pay a dividend as another area. Orchids Paper Products Company (TIS) is one I recently bought that I have been watching a long time. It still is fairly valued and the GN is at/near $20.00/share.
re valuation - the FED model is irrelevant. I think the better indicator are the high yield bonds. When you look at those, (JNK, HYG), they have performed even worse than the SP500 (down 7% last year ) ishares.com
The meltdown in the high yield (junk) bonds is very pronounced and often correlates with issues in the economy or predates them. Also remember the issues with the 3rd Avenue junk bond funds that eerily remind me of the issues in the bond markets seen early on in 2007.
I think the bond market has better opportunities than the equity markets right now - equivalent pot. returns, but with less risk. The main issue is much less liquidity. From a value perspective, the overall market is not cheap, especially considering the fissures in the economy, so one should be careful scaling in.
Speaking of bonds, I bought a decent batch of NSS minibonds yesterday around $18.X. The are sub bonds for the NS MLP that convert to a floating rate (Libor plus 6.7% in 2018) , so there is no interest rate risk.
I figur that if things get tight, they will cut the distributing first and should have enough cash flow to pay their debt. FWIW, this is non investment grade, so do your own DD.
I disagree. I see people trashing around because of the market drop, reading tea leaves (I won't mention another T-word), making off the hip macro predictions (I did mention tea leaves already) or trying to find patterns similar to last crash. IMO all of this is counterproductive. If things are cheap, buy. If not, don't. I should have done more of the latter ("If not, don't") in 2014-2015, but situation is very different now.
Another take on PSX with regard to Buffett's stock selection criteria as in the following table ...
Here we have info from the most recent 5 years of Annual financials :-
· Gross Profit at 14.8% way below >40% target. This is supported by EBITDA/Revenue margin of only 4.3%, which isn't great.
· SGA/Gross Profit only 7%, well below <30% requirement, so Salaries and company 'Running Expenses' not excessive.
· Interest Expense/EBIT only 4.4%, well below <15%, so company's debt not seriously reducing Revenue. However, debt cost to company has been creeping up slightly over recent years. Something to keep an eye on.
· Net Earnings/Revenue very low at 2.9% bearing in mind target of >20%. This is something of a surprise to see Buffett buying these shares with such a low Bottom Line return, which also doesn't do much to add to Retained Income on the Balance Sheet. This 2.9% is not surprising seeing as how much Revenue has been consumed prior to EBITDA.
· ROE of 22.1% is only slightly below >25%, but it has been improving over recent years, so it's a positive.
· Equity Bond of $291 with current share price at a 72% discount at $79.25c. Maybe this was one of the attractive features for Buffett to buy into PSX ?
So, from a business performance point of view, has PSX performed in line with what Buffett looks for ? It may be Ok in terms of lack of debt, ROE and discount to Equity Bond, but one has to wonder with regard to the very low percentage of Top Line Revenue that has reached the company's Bottom Line.
PSX appears to have found price support at ~$75. It's next resistance level is somewhere around $85.
Should be interesting to see if it goes through $85 and also goes past ~$93.
OT- John I appreciate the RSI chart that does seem interesting. I agree that understanding what happened in the 70s is crucial to understanding the money flow between physical and financial assets. The Russell makes me nervous and I'm half considering selling my microcaps and just holding puts and cash. Even Buffett got killed in the 70s - it's really a question of whether you want to trade it or weather it. Looking at the 100 year Brent gets me excited - some of the great fortunes of our time will be made in commodities.
While I look at the Schiller PE as a loose measure one had to be uber careful using earnings as the operating metric. Earnings can be inflated through leverage and balance sheet tactics (a practice the tbook usually unveils) but those methods aren't sustainable. Because of reflexivity/ groupthink Fortune 500 CEOs tend to employ these tactics in synchrony (waah, his bonus is bigger than mine) producing systemic distortions of SPE. This is one reason there were lots of low/ reasonable PEs before the crash of 29. I recently read somewhere that MB said "one should view blue chip stated PEs with caution" or something to that effect, so I feel like I have some external corroboration. For some reason WSJ keeps saying the TTM SPE is 17 whereas I could have sworn I read an article saying it was 27.
Been thinking about investments specifically the last 20 years. I remember Wall Street Week and Sir John Templeton. In the early 80's he was quoted as saying DOW 10,000 by the year 2000. That was totally unbelievable but it happened.
I used the above S&P calculator to see just what the compounded return was for the S&P from 1985 - 2000 vs @ 2000 - 2015.
I was quite surprised by the results ( you do the calculations). I still use a lot of the same fundamental valuation screens for my Buys and focus on buying good companies at an undervalued price and holding forever.
I guess those that only started investing in 2000 may feel a bit skeptical about the buy and hold strategy. I too would be with the compounded returns from 2000-2015..
I am not too sure why the compounded rates of return were/are so low (maybe it is the time period you look at) but the 2008/2009 crash and/or the internet bubble crash of 2001 may have been part of the story.
I started investing in the late 70's and pretty much added money every year in the 80's through 1990. I watched Wall Street Week and had a large holding in John Templeton's fund. In fact, I used his top 10 holdings as my individual stock picks during that 20 year period from 1980-2000. Many of those buys did very good.
Some say Templeton was better than George Soros, Peter Lynch and Warren Buffet combined.
My takeaway is you have to keep everything in perspective. I still think the U.S. market is the best market in the world ti invest in and will be for the foreseeable future.
Do you have any insights on why UAN is hitting new lows other than market madness?
I thought I was lucky to get into that one below $8.00, now it's $5.76! I understand high yield, MLPs and energy is getting sold off, but hopefully this one is throwing the baby out with the bathwater. Any reason to expect a disappointing distribution for Q4 2015? I'm hoping they pit out more than 35 cents, which makes the annualized yield above 20%.