Gavekal Capital: An Unconventional Way Of Looking At Valuations

Thursday, December 18, 2014

An Unconventional Way Of Looking At Valuations

An unconventional way of looking at valuations is to place companies into different "buckets" based on their absolutely valuation level. This gives you a simple way of understanding where the majority of stocks lie in terms of valuations levels

In the charts below, we take a look at price to earnings, price to book, price to cash flow and price to sales ratios. We want to see whether or not a majority of companies lie above or below certain absolute levels.

For example, we break out two groups based on price to earnings ratio. We are looking at the percentage of stocks in the MSCI World Index with a P/E ratio over 10x and the percentage of stocks with a P/E ratio under 5x. 86% of all stocks in the MSCI World Index have a P/E ratio over 10x and only 8% of stocks have a P/E ratio less than 5x. In early 2009. less than half of all stocks at a P/E ratio over 10x.

In early 2009, 46% of all stocks had a P/B ratio of less than one. Conversely, 54% of stocks had a P/B ratio greater than one. Currently, only 16% of stocks have a P/B ratio of less than one and 84% of stocks have a P/B ratio greater than one.

The percent of stocks with a P/CF ratio over 10x is at its highest level since July 2007. 59% of all stocks in the MSCI World Index have a P/CF ratio over 10x. In early 2009, only 19% of stocks had a P/CF ratio greater than 10x. On the flip side, only 11% of stocks have a P/CF ratio less than 5x. In early 2009, this percentage stood at 47%.

Last but not least, we have the price to sales ratio. 71% of all stocks in the MSCI World have a P/S ratio over 1x. This is a higher percentage than it was in July 2013. In fact (not shown), 44% of all stocks have a P/S ratio greater than 2x! In early 2009, only 16% of stocks had a P/S ratio greater than 2x. Currently, only 29% of stock have a P/B ratio less than 1x.

About Gavekal Capital

Gavekal Capital is a US registered investment advisory firm that manages the Gavekal Knowledge Leaders Strategy. Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Gavekal Capital seeks to identify the world’s leading knowledge companies through a proprietary process that analyzes corporate knowledge investments.
We offer the Gavekal Knowledge Leaders Strategy in multiple products for global investors. For more information about our product offerings please visit http://www.gavekalcapital.com.
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Disclosure

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. An investor cannot invest directly in an index. Hyperlinks may be included in this message that provide direct access to other internet resources, including web sites. While we believe these links are to reliable sources, Gavekal has no control over the accuracy or content of information contained on these sites. Although we make every effort to ensure such links are accurate, up to date and relevant, we have no control over pages maintained by external providers. The views expressed by these external providers on their own web pages or on external sites they link to are not necessarily those of Gavekal.
The information listed on this blog is for example purposes only and should not be construed as the investment Advisor's opinion or investment outlook. As of the most recent quarter end, the named companies may have been held by the investment Advisor. Please review the most recent disclosures. For full information including additional policies and full disclosures on the Advisor, please visit our website gavekalcapital.com.