Do you have bulls or bears to thank for what you are stepping in?
We have been hearing a lot of negative news about the economy. Many bears claim that virtually no company is profitable, and that the cogs of our economy are completely locked up. This sounded dubious so I tested it for myself.
I took the 4,238 stocks my system evaluates. These stocks are all US, listed, non-finance stocks. I summed up their reported net incomes from 2007, and their reported results from the last 12 months.
2007 - Total Net Income: 949,096 Million
2009 - Total Net Income: 967,278 Million
Indicating a 2% growth in earnings!
This may have been caused by a small increase in companies operating in 2009 that were not operating in 2007, and inflation. Regardless of that, we have not seen the "cataclysmic" drop in earnings that some are going ape crazy about.
2007 - The S&P 500 value on this day was: 1502
2009 - The S&P 500 value today is: 921
That’s a drop of about 39%!!!
I will be the first to agree that prices were inflated in 2007. But that drop seems pretty extreme considering the gain we have made in earnings. (You may be thinking that the S&P 500 is not representative of the group of stocks I evaluate, and I partially agree, so I let’s look at the Russell 3000).
2007 - Russel 3000 is at: 87.6
2009 - Russel 3000 is at: 53.8
That’s a drop of about 38.5%!! (Pretty much the same as the S&P 500)
So if we were to simplify the world and figure out the p/e ratios for these two years they would be:
If we assume that the average P/E in 2007 was 14, then I calculate the current P/E to be about 8.44.
In the past, higher interest rates have driven down that P/E, but we don’t seem to have that situation today. I do think that there is decreased capital available right now, which may explain this lowered P/E ratio. But, for those of us with capital, it seems like it may not be that bad of a time to buy.
I generated all these numbers from my own analysis, feel free to disagree with them or ask any questions. (I don't buy all the crap the media is feeding us, so I try to leverage my technology to do my own analysis.) Also let me know if this was interesting, so I know if this is something I should spend another Sunday afternoon creating into a post.