Week 380 - Are Stocks in “The 2 and 8 Club” Overpriced?

Situation: There’s a lot of talk suggesting that an “overpriced” stock market is headed for a fall. And sure, stocks do have rich valuations because the Federal Reserve has kept money cheap for 10 years and bonds don’t pay enough interest to compete for investor’s money (because the Federal Reserve bought up long-dated bonds). Now the Federal Reserve is determined to reverse those policies and investors are having to get used to the idea that stocks will revert to true value. But we have to specify which metrics define “overpriced” and use at least two of those before concluding that a particular stock is overpriced (see our blogs for the past two weeks).

Mission: Run our Standard Spreadsheet, using colors in Columns Y and Z to highlight Graham Numbers and 7-Yr P/Es that are overpriced (purple) or underpriced (green).

Execution: see Table.

Bottom Line: In the aggregate, the 32 stocks in “The 2 and 8 Club” have Graham Numbers that are more than 200% of their current valuation. This leaves room for at least a 50% fall from present prices. However, our confirmation metric does not support such a dire prediction: The average 7-Yr P/E is a little under the upper limit of the normal range for valuations (25). 

Stocks issued by some companies appear to clearly be overpriced, in that the Graham Number is more than twice the stock’s price and the 7-Yr P/E is more than 30: TXN, ADP, UPS, HSY and CAT. Other companies appear to clearly be underpriced in that the Graham Number is less than the stock’s price and the 7-Yr P/E is less than 25: CMCSA, PNC, ADM, PFG and MET. The fact that 5/32 stocks are overpriced and 5/32 stocks are underpriced is indicative of normal distribution (Bell Curve). So, we’ll use this approach often in future blogs.

Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into NEE, JPM, CAT and IBM, and also own shares of TRV, MMM, CSCO and CMI.

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