For Long Term Investors Stocks Are Cheap, Aren't They?

The S&P price to earnings multiple is nearing depths not seen since the early 1990’s.

In fact stocks in the S&P now trade at just 11.7 times analyst estimates of operating earnings for the coming year. The P/E multiple is roughly back where it stood at the end of March 2009 just as the market was starting an 80 percent surge.

A lot of investors are kicking themselves for having missed that run-up. The question now: Should they jump in now to not to miss another? Are stocks cheap?

According to Mike Darda of MKM Partners, you should.

”Unless we are heading back into a recession and I don’t think we are, equities are more attractive than the alternatives,” he tells the desk.

"Equity earnings yields run between 7-9%." Darda explains. "That's several percentage points above where corporate bonds yields are and Treasurys are at 2.5%."

“I don’t know if the market goes up next week or even next month but if you have patience equities are the asset class to be involved in,” he concludes.

And he's not just talking stocks tethered to China or multi-nationals.

"I like US equities and global equities; and I like cyclical areas most," Darda says. "I think in 2011 we have above trend economic growth both globally and in the US."

Darda isn't the only one who sees value in stocks.

Mason Hawkins, CEO of Southeastern Asset Management, has trounced the market by buying stocks when others are selling, and he's been buying lately. His flagship Longleaf Partners Fund returned 4.9 percent annually in the past ten years versus a 1.6 percent decline in the S&P 500.

To get a sense of whether stocks are cheap, the 62-year-old Hawkins looks at how much of your investment you get back in earnings in a year. Based on analyst estimates, if you bought every Dow stock at Friday's 10,150.65 close, you'd get 11 percent back. Though you're not actually pocketing any cash, that's still a big return. After all, some relatively safe investment-grade corporate bonds are throwing off annual interest of 5.3 percent what you pay for them now. That means you'd get nearly six extra percentage points by holding stocks. Since 1932, the difference in yields between bonds and stocks following big drops in the stock market has been 2.8 percent, Hawkins says.

Of course, there's another side to this argument.

"Value schmalue," scoffs Michael Block of Phoenix on Fast Money. "Yes stocks are cheap right now but I see no reason that they couldn't get a lot cheaper. Dangerous times are probably still ahead of us."




This article from CNBC is garbage for a few reasons:

1. PE ratio is the single most overused and inaccurate financial ratio. PE ratio study the relationship between price of a share now vs the earning per share for the previous period which is misleading. A company that did well last quarter or last year doesn't necessary will do well today.

2. Those analyst missed one important point: US economy is going down and nobody can stop it (yep, even Helicopter Ben). If the economy going down, businesses will follow.

3. The rise from March 2009 is just a inflationary adjustment run. Technical bounce from the huge slump from Nov 2007 to March 2009 + trillions of dollar injected into the system need to be adjusted and as a result, assets price, including stocks price increase nominally. However the real price of stocks (vs gold, vs money supply or vs inflation) are falling all the time.

4. Money management is not about where to invest and to get the highest earning. It is not about bond vs stocks vs derivative vs currency vs money market instruments etc. It is not when bond yield very low, we buy stock. Money management is about risk management. it's about the reward to risk ratio and about maintaining the value of wealth. If there is nothing to invest, keep your money in the safest place. Put it into fixed money market instruments or short term government bond or physical precious metal.