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We looked at the Ford Equity Valuation model at the start of the year when it had reached parity, implying that stocks were priced exactly where they should be.
Since then they went on to rally even more and stretched the valuation to about 1.14 but with the recent rapid decline, once again, valuation is below parity (black line in chart below). This means that all things considered equities are surprisingly cheap right now:
Source: Ford Equity Research
Ford’s price to value ratio (PVA) is similar to the Q-ratio but instead of just replacement cost, it takes into account earnings, quality rating, dividends, projected growth rate, and prevailing interest rates. Since the formula is proprietary, we don’t know its exact make-up.
But based on the historical track record of this valuation metric, it serves as a good model, able to pick out not only extreme lows but also major tops. For example, it was able to signal both the 1987 and 2000 tops. Using valuation tools like this or the Q-ratio to trade is tricky because they move as slow as molasses in January. You either have to ignore them or expand your time horizon to Warren Buffett proportions.
Also interesting is that while several US large caps are recognized by now as being wildly cheap, the Ford Equity Valuation model is saying that both the S&P 500 and the S&P 600 (small cap) indexes are cheaper now than they were at the 2003 bottom:
S&P 500 Index (Large Capitalization Stocks)
S&P 600 Index (Small Capitalization Stocks)
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