An Unconventional Way Of Looking At ValuationsDecember 18, 2014
An unconventional way of looking at valuations is to place companies into different “buckets” based on their absolutely valuation level. This gives you a simple way of understanding where the majority of stocks lie in terms of valuations levels
In the charts below, we take a look at price to earnings, price to book, price to cash flow and price to sales ratios. We want to see whether or not a majority of companies lie above or below certain absolute levels.
For example, we break out two groups based on price to earnings ratio. We are looking at the percentage of stocks in the MSCI World Index with a P/E ratio over 10x and the percentage of stocks with a P/E ratio under 5x. 86% of all stocks in the MSCI World Index have a P/E ratio over 10x and only 8% of stocks have a P/E ratio less than 5x. In early 2009. less than half of all stocks at a P/E ratio over 10x.
In early 2009, 46% of all stocks had a P/B ratio of less than one. Conversely, 54% of stocks had a P/B ratio greater than one. Currently, only 16% of stocks have a P/B ratio of less than one and 84% of stocks have a P/B ratio greater than one.
The percent of stocks with a P/CF ratio over 10x is at its highest level since July 2007. 59% of all stocks in the MSCI World Index have a P/CF ratio over 10x. In early 2009, only 19% of stocks had a P/CF ratio greater than 10x. On the flip side, only 11% of stocks have a P/CF ratio less than 5x. In early 2009, this percentage stood at 47%.
Last but not least, we have the price to sales ratio. 71% of all stocks in the MSCI World have a P/S ratio over 1x. This is a higher percentage than it was in July 2013. In fact (not shown), 44% of all stocks have a P/S ratio greater than 2x! In early 2009, only 16% of stocks had a P/S ratio greater than 2x. Currently, only 29% of stock have a P/B ratio less than 1x.