One way we like to gauge the general level of valuations is to look at the multiple at which the
median stock is trading and compare it history. This method of analyzing the median stock valuation solves two problems:
- It greatly reduces the impact of outlier valuations in an average
- It greatly reduces the impact of the largest cap stocks in a typical market cap weighted valuation analysis. There can be times, like now, when the valuations of mega cap stocks aren't terribly demanding (think Microsoft, Exxon Mobile, Apple) and using a market cap weighted valuation approach can give a misleading result for the typical stock.
So with that said, where do things stand today? We find that the median stock is trading near the previous two peaks of valuation multiples (1999 and 2007) suggesting that we should not expect much more multiple expansion from the median stock going forward.
