WSJ Takes A Leap Too Far In Assigning Causation To Energy Sector Valuations

Adam Feik - Contributor - Energies

The WSJ Morning MoneyBeat blog post for Tuesday, March 22, was entitled, “Energy Stocks Are the Most Expensive in S&P 500.”

Are they really?

As I read the WSJ’s post, I decided I really have to use this as an opportunity to help dispel some widely – nay, almost universally held – notions about using P/E ratios to predict stock price movements.

How Not To Use P/E

Almost all investors, in my experience, routinely fall into the trap of misusing the P/E. In fact, I admit I fell into the same bad habit for many years myself. Until a couple of years ago (more on that later).

Don’t get me wrong. It’s not that the ratio can’t be useful. On the contrary, when properly interpreted, P/E can be an indication of sentiment, which is always important for an investor to understand. When P/Es are low (remembering to mentally adjust absolute P/E figures to account for differences in interest rates, inflation, and other market conditions in order to accurately assess whether P/Es are truly “low” or not), sentiment is probably somewhat sour, generally speaking. High P/Es (all things considered) generally mean investors feel willing to “pay up” for earnings, growth, dividends, and/or other perceived benefits of owning stocks. And again, having a feel for what the market’s sentiment is can be helpful (often in a contrarian sort of way).

Beyond the ratio’s use as a rough sentiment gauge, however, I’ve learned several things in the last couple years about using (or misusing) P/E ratios (for individual stocks and for the broad markets), which I’ll summarize as follows: Continue reading "WSJ Takes A Leap Too Far In Assigning Causation To Energy Sector Valuations"

Play Defense With This Strategy In 2015


Over the holidays, I decided to drive to Orlando and give the Walt Disney Co. (NYSE: DIS) a few of my hard earned dollars. My 12 year-old son talked me into riding the Tower of Terror at Disney’s Hollywood Studios.

As a thrill ride, the Tower of Terror plays on three of humankind’s most basic fears: falling, the unknown and the dark. I wasn’t that concerned. In the investment biz, that’s just another day at the office.

But when it comes to the investing, I’ll be honest. I am a concerned about the stock market in 2015.

Here’s why: It’s all about earnings.

At the end of the day, an investor should buy a stock based on the underlying company’s ability to deliver quality, consistent earnings. Those earnings should also be purchased at a fair-to-discounted price as measured by a stock’s price-to-earnings ratio (PE).

In more bullish times, investors are sometimes a bit too optimistic about the future and will push stock prices and their attached PE’s higher. In bearish times, they often become too pessimistic and drive prices and PE’s down.

I took notice after working on this chart of peak PE ratios for the SP 500 Index.

The way the picture tells the story, we’re overly optimistic and at the same valuations as before the 2008-2009 crash.

So are we so positive? The current numbers don’t indicate a profoundly bullish market in 2015.

Consensus estimates for the SP 500's 2015 EPS are around $125. In 2014, the SP saw EPS at around $117.

If things go according to plan, the market would see EPS growth of about 6-to-7%. Curb your enthusiasm. Continue reading "Play Defense With This Strategy In 2015"