Is the market expensive today?
Valuing Dutchman Update Week 15 2024
Where is the market today?
As you know, I occasionally like to look at where the market as a whole stands. Although this doesn't directly influence our investment decisions, it does help to put our position into perspective, especially with cyclical companies, compared to sector peers. When everything is expensive, even the cheapest among that group can still be too expensive.
One indicator I find interesting is the so-called Buffett Indicator. This compares the total market capitalization of all listed companies in a country to the gross domestic product. Of course, there are counterarguments to this, especially regarding the tech companies, but it still provides an indication.
Over the past 20 years, it has been observed that since 2017, the deviation has been increasing. After a slight downturn in 2022, we are now exploring new highs.
If we zoom out further, we see that before the dot-com bubble, the total market capitalization in America was below the GDP. Of course, the argument is made that tech giants also generate a lot of revenue outside America, but that was already true for companies like Coca-Cola back then.
This indicator suggests that the total American stock market is currently significantly overvalued. However, as we know, this is limited to a portion of the market. Even in America, bargains can be found among smaller companies.
Also measured by another indicator, the Shiller PE, the S&P is almost at one of its highest valuations ever, at 33.9, nearly double its historical average of 17.5.
I reiterate once again, that this overvaluation is truly concentrated in some companies, especially when we look beyond the S&P 500 to smaller stocks where opportunities still exist.
Looking further, we see that the United Kingdom is considered undervalued according to these indicators, as well as Belgium. Most other European countries are neutral or rather expensive, but only the Netherlands is considered significantly overvalued, although we all know this can be attributed to almost a single company.
David Einhorn, the well-known American fund manager of Greenlight Capital, has indicated that in his view, the markets are "fundamentally broken" by passive investors. You can read more about this or watch his interview on CNBC.
I believe he attributes the irrational behavior of the market too easily to passive investors. We also saw this in the 1970s with active managers during the Nifty Fifty era. Back then, you couldn't go wrong as a manager by buying these 50 giants, just as today you can't go wrong by buying Nvidia, Microsoft, Amazon, or other big players. In my opinion, passive investors only reinforce this trend that was already present.
Just like back then, we see a huge discrepancy between different parts of the market. The good news is that this creates long-term opportunities for us as investors in individual stocks who do our research and look where apparently nobody else wants to be right now. We can pick up great companies at great prices. Our patience is being tested, and we can't say for how much longer, but this trend will also eventually turn, and then we'll be in the front row to take advantage of it.
Update
Every week (except during holidays and when there is no news), I report on the stocks from our selection. Especially during periods when companies publish their figures, it can be quite extensive. However, I always try to focus on the most important matters.
This week:
Cake Box: positive trading update
Exor: recalculation of the fair value
In short: Tessenderlo