Author Topic: S&P500 valuation based upon cash returns  (Read 1714 times)


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Re: S&P500 valuation based upon cash returns
« Reply #10 on: January 19, 2020, 03:21:39 PM »
The more relevant ratio is EV/EBITDA rather than Debt/EBITDA because people here are buying the stock. I don't have a Gurufocus membership but i bet the EV/EBITDA is at an all-time high outside of recessions. Their EBITDA is only trending down.
But more importantly, the big picture is that the 2000 and 2008 blowups happened when the inflation rate (at least in the growing areas such as the West Coast) was similar to what we have now. Over the last two years, the CPI-U for the 13 Western states has hovered around 2.5-3.5%, not different from the times when Greenspan and Bernanke raised rates to 6% and 5.25% to pop asset bubbles. They popped bubbles at higher-unemployment levels and lower stockmarket-to-GDP and debt-to-GDP levels.

The one big difference between the last two times the Fed popped bubbles is that they were in the second Presidential terms. Other than that excuse, we have record valuations for corporate-debt-to-GDP, stockmarket-to-GDP, lowest unemployment since the 1960s for the last two years.

I agree with you in that it's a good metric and agree that it is helpful to contextualize valuations.

I would temper anyone using it as "bullish" evidence with that it is covered by earnings, but only barely.

I would temper anyone using it as "bearish" with the other stuff I've posted about a lack of leverage in the S&P 500 and that large corporations are not taking an undue amount of leverage to buy back stock. I've posted a bunch of that stuff in the "wilshire 5000 market cap to GDP thread.

CSX's debt to EBITDA has been between 2.0 and 2.6 for the last decade. It is at the higher end of the range.

Should we be bearish because CSX is now 2.6x levered?

In my view, considering they just raised 10 year and 30 year money at t+97 and t+145 (2.4% and 3.4%, pretax), we should be okay with them raising that money.


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Re: S&P500 valuation based upon cash returns
« Reply #11 on: January 19, 2020, 03:44:46 PM »
comparisons to 2000 and 2008 are worth making...but when you make them you see that the massive excesses of those years are not here now.  I understand and that hedge funds are massively leveraging to get a few bps on arb trades and that is never a good sign, but in terms of the mortgage/corp debt markets and equity/IPO markets, not a lot of excess.  WE would have taken off in 2000, and PLSs with no docs mortgages are nowhere to be seen now.  and shareholders are getting real cash returns.  sometimes you have to smell the roses if they are on offer
« Last Edit: January 22, 2020, 05:47:46 PM by cherzeca »

John Hjorth

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Re: S&P500 valuation based upon cash returns
« Reply #12 on: January 21, 2020, 06:26:32 PM »
compare to BRK, no dividends, very little stock buybacks, huge cash accumulation at corporate level, underperformance vs SPY last year.  maybe warren needs to add a new filter to his process...

Given the divergence BRK has actually starting creeping up my list of "attractive" investments the last few weeks/months. I hate the inaction and cash build, but given the circumstance, if anything, I would adjust the lens I look through and perhaps see it as a way to maintaining a modest, but impactful access point to investing if reasonably priced equities. Even if they hold AAPL to eternity, the huge cash surplus balances out the volatility in the portfolio, should there be any.

I do think the above conversation reveals one thing; it may be great that companies are paying out more. Definitely! But at around 100% payout for the average company, the things RuleNumberOne has been harping on, like earnings and revenue growth, will really start to matter. Given that the future valuations will be dependent upon is hard not to argue that we arent getting very much if any margin of safety at these prices.

Koompaya! [ ;-) ] You'll never get a cash dividend from BRK as long as Mr. Buffett is [still] around.
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