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IBES Valuation Model: Stocks Ridiculously Undervalued




This is just a quick follow up. For further details see my first message from last summer on the I/B/E/S Valuation Model for the stock exchange.

What's amazing is that according to this model, we are even more undervalued now. Pretty much as "cheap" as the bear market bottom in 2002. So, when a fairly good historical indicator goes totally berserk like this, it can be two things:

  1. circumstances have changed (GIGO principle)
  2. something real is going on

If you like the first option, you can trot out the 10 Year Note's crazy low yield and blame it for the outlier result.

If you like the second, you can retort with, "Pshaw! We had the same rates in 2002 and look how far equities ran."

In either case, it's your call.

(FYI:I'm leaning towards #2)



IBES valuation model follow up Jan 2008

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9 Responses to “IBES Valuation Model: Stocks Ridiculously Undervalued”  

  1. 1 Mark Lamb

    In your opinion why has this model's reading "extremely undervalued" for almost 5 straight years?
    Thank You...Mark

  2. 2 Gerg

    So, couldn't that graph be equally labelled "Bond valuation" with "Overvalued" and "Undervalued" be swapped?

  3. 3 Babak

    Mark, perhaps the last time it got stuck in an extreme reading may hold a clue.

    Gerg, not really. The earnings estimates are the numerator and they change so there's an interplay between them and the bond rates.

  4. 4 umagumm

    I like the the graph better upside down

  5. 5 Babak

    umagumm, so you think in 1999/2000 stocks were undervalued?

  6. 6 Jason

    Mark has a point that is subtly made, but perhaps too subtly for some.
    The point is that the usefulness (or rather lack thereof) of a chart that shows stocks to have been extrememly undervalued for five whole years is something that beggars belief.
    Next.

  7. 7 Babak

    Yeah, I see your point now. It is a bit of a conundrum.

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