Nice bottom or was it?

Last week I started writing a post on using Price to Earnings Ratio. It still sits in my draft folder and since then it seems like every second article I read is about P/E. There are so many P/E ratios being published these days it’s hard to see the forest for the trees.

Rather than reinvent the wheel I’m simply going to point you in the right direction, with two of my favourite recent articles on the subject.

Russell 2000 PE 5.9x - Toro’s Running of The Bulls

The median price/earnings ratio of stocks in the Russell 2000 on trailing 12 month earnings closed today at 5.9x.  The median PE on forward earnings for 2009 is 8.0x.

• For the Russell 1000, the median trailing PE is 7.6x and the forward PE is 9.3x.
• For the Russell 3000, the median trailing PE is 6.6x and the forward PE is 8.6x.
• For the S&P 500, the median trailing PE is 8.6x and the forward PE is 9.4x.

Valuations are at generational lows.
The question now is do valuations reach lifetime lows?

via Toro’s Running of the Bulls Market Blog: Russell 2000 PE 5.9x.

The following excert from a great post by Jeff Miller is exactly type of article I was working on, he even lists the usual suspects I was referencing, i.e. Shiller, Siegel, Hussman and Kass. Miller’s article is well worth a read, it provides an excellent overview of earnings and insights into the different interpretations.

Defining Earnings – A Dash of Insight

Earnings can be defined in many ways, with a myriad of decisions.  Here is a sample:

• Reported or GAAP earnings, which include all of the financial write downs and various other “one-time” charges for severance pay.
• Operating earnings, attempting to exclude the one-time charges.
• Normalized earnings, where the analyst looks at a general trend over a long time period, attempting to smooth the business cycle.
• Weighted earnings, suggested by Prof. Jeremy Siegel, who believes that the reported S&P earnings over-emphasize the smaller cap stocks.
• Peak earnings, advocated by John Hussman, where one looks to past peaks in earnings and considers the trend in these peaks.
• Forward earnings, where one looks ahead instead of backward, trying to estimate the earnings power of the upcoming year.

via A Dash of Insight: Searching for the Bottom: Valuation.

My own view is there remains way to much focus on calling a bottom and looking for signs of a market bottom based on historical analysis. While it is important to be versed in the market’s history and use that knowledge as a rough guideline, my focus is on the here and now. Selling fully valued stocks and buying undervalued has been and remains my strategy. Whatever your strategy, now is not a good time to changing horses (you reading this Mohnish Prabai!). Doing so may mean you’re being dictated to by the market and have lost your direction.

Related posts:

1. Was that a bottom?