Leuthold's Doug Ramsey, Ariel's Charlie Bobrinskoy, and Tom Forester of Forester Value give their take on current market valuations and where they are seeing value today.
Dorsey: Moving on to equity valuations, you guys [Forester and Bobrinskoy] are mainly bottom-up shops, you're [Ramsey] more of a top-down shop. But just before we get into specific stocks and process, any general thoughts on sort of market level valuations, high, low and fairly valued, indifferent?
Forester: The S&P is trading, call it, 15 plus or minus, and historically that's kind of middle of the range, if you will. It's not ridiculously cheap. Certainly, it's not 35 times like it was in the early 2,000s and whatnot. So normally we would be somewhat neutral to positive. Retail sales have been up. There has been a little bit of momentum going on in the economy. So normally that would be good for us.
I think our concern, though, is, is that the federal government is running a deficit of, I don't know, 8% give or take, and you've got the Federal Reserve printing money and pumping more money into the economy. And so it's not an economy that stands on its own two feet. And so, in normal times, I would say it's neutral. In these times, where there is a lot of extreme life support, if you will, going on still in the economy, I would actually say things are fairly expensive right now.
Bobrinskoy: We'd be more bullish than that. We would tend to look forward and use that 12.5 multiple on the S&P for the overall market. You're right, on a trailing basis it's more like 15. But companies have bought a lot of stock and they have so much cash on their balance sheet, we think they are going to buy a lot of stock in, which is going to improve earnings without them doing anything on the operating side.
There has been so much ... so much improvement in productivity that we think it's not hard at all for the S&P to go from 82 to 92 in terms of earnings. And in this interest rate environment, those kinds of 8%, 9% earnings yields just seem very attractive to us, and we think there is a real good chance that people are going to get frustrated with these very low or what we think will be negative returns in fixed income, and the money will start coming back into the market, and we'll get multiples that are more like mid-teens forward multiples.
Ramsey: I'll just preface with this: we use a normalized earnings number, so my numbers are going to sound a little bit different than what they were using. But the S&P 500 currently on our five-year average earnings trades at 18 times, and that is right on its 60-year median. So, we'd say U.S. equities, large-cap equities are right at fair value.
We think as confidence returns and people become convinced this is not going to be something that unwinds into an economic double-dip, there is room for that number to go somewhat higher; not back to '07 levels, certainly not back to '99, 2000, but I think there is room for valuation expansion.
I'd say the same thing about emerging markets. They're also right about 18 times normalized earnings, and again that sounds high, but we're just averaging over five years. So I think they are around fair value, room for multiples to expand.
To me the big valuation opportunity and the big disparity is, developed countries outside the U.S., because currently they're more like 13.5-14 times.
In the past, 1990 bear market low and the 2000 bear market low, those bear markets bottomed with those stocks--and here I'm talking about some of the big usual suspects, I mean Japan, Germany, France, all the European countries, Australia. Collectively they bottomed at around 18 times this normalized number.
So, even though we've had a very nice rebound, I mean 80% rebound on average in those markets in the last 21 months, we're not even back up to where we bottomed in 1990 and '02. So those big companies outside the U.S. in developed markets, I think, have a lot of room to close that valuation gap.
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Dorsey: That's a really interesting point, because I was having dinner with a portfolio manager I know in London about a month ago who manages an all-Europe fund, and he is buying things like small metals distributors and Dominos Pizza, stuff that's not really affected by the PIIGS crisis, and their numbers are off the charts, and he was looking to getting outflows all year, because basically people aren't looking at our performance or our holdings, they're just saying, my Lord, Ireland is going to default, I'm taking money out.
Has that resulted in more opportunities you think in European names? Have more European names been popping up on your screens, Tom and Charlie?
Forester: We run an international fund as well, and certainly we own a fair amount of European stocks, and quite frankly, the valuations in Europe are quite attractive. It's because of the environment that you're in, but you see many more single-digit P/E stocks over in Europe than you do in the United States right now. So there is a lot of attractiveness.
Dorsey: So you'd say – again, it's a very big picture question -- but by and large you're seeing more value in Europe than you are in U.S. stocks?
Forester: Yeah, I would say, yeah.
Dorsey: Okay.
Bobrinskoy: We tend to be pretty domestically focused, and our clients pay us to invest where we have expertise and so more of that's in the U.S.
But, yeah, I think the larger companies are getting great growth internationally, but more in the emerging markets than they are in Europe. Most of our managers are talking about the U.K. still being pretty slow. There is still being some long-term challenges in non-German Continental Europe. So, I think we directionally would say an IBM is going to get more growth out of ex-U.S. international ex-Europe than we are out of Europe.
