In his latest commentary on whether technology stocks are overvalued, Ken Fisher says that investors should flip their PE’s into EP’s to get a better understanding of their true value. He also makes the point that investors commonly make the mistake of thinking that valuations somehow are predictive of what will happen to a company’s price over the next one, two, three years. Here’s an excerpt from the commentary:
So, one thing you hear a lot right now is to say that technology stocks are overvalued.
And of course that isn’t singularly related to technology stocks per se, but also stocks that aren’t categorized as technology, but thought of as technology like let’s say Amazon which is technically in consumer discretionary–not in technology–and the answer is some are some aren’t.
The category overall isn’t really so bad when you think about the fact that if you were to take the PE’s, flip them on their head into EP’s and think of that as an interest rate, compared to long-term bond rates and then remember that the “E” presumably should keep growing from the growth associated with that technology–assuming that it’s really technology that’s aimed at growth and successful at that—in that regard the valuations don’t really appear bad at all, they don’t appear great either.
The other point I want to point out to you, is that people in stocks routinely make the presumption that they think valuations somehow are predictive of what will happen to price over the next one, two, three years.
And in fact, over intermediate to semi-long-term time periods valuations—both the stock market as a whole and for subcategories of the market—both low and high have never been predictive of future returns.
So, while technology stocks aren’t overall cheap and not overall disastrously priced if you think of them correctly. It’s still also true that even if they were overpriced or cheap, that wouldn’t necessarily be telling you where they go next year or the year after or the year after.
Warren Buffett famously said, that “in the short term the market is a voting machine and in the long term it’s a weighing machine” and what that means is that in the short term, it’s about popularity and in the long term it is about value.
But that long term is well out there, it’s not about the next one, two, three years. The market doesn’t weigh in that way over the next one, two, three years. It’s still mostly focused on popularity.
You can watch the entire commentary here:
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