Are stocks "Too High"?

Stock Prices: Is ‘Quite High’ Too High?

Excerpt:

Consider one of the most widely followed ways of measuring stock valuations—the cyclically adjusted price/earnings ratio, or CAPE, which was devised by Robert Shiller, a Yale University economist and Nobel Prize winner. The CAPE is calculated by dividing stock prices by average earnings over the prior decade, all adjusted for inflation. The ratio for large U.S. stocks in April was 27, while the long-term average since 1881 is 16.6, according to Mr. Shiller’s data. When the ratio is above average, future returns are often lower down the road. When the ratio is below average, future returns tend to be relatively high.

Comment: I was asked this question this week. My take is that some stocks are too high. I think Facebook is too high. DOW ... about right (see image above). A tutorial on the P/E ratio.

EV/EBITDA (Enterprise Multiple) better than P/E ratio for value investors

A Superior Metric for Value Investors

Excerpt:

Enterprise value (EV) is calculated in the following way:

EV = Market Cap + Total Debt + Preferred Stock + Minority Interest – Cash

This gives us a theoretical takeover value, which is similar to how an investment banker might value the company.

The denominator of the ratio is EBITDA, which stands for earnings before interest, taxes, depreciation and amortization.

Basically, it’s the earnings that are available to all stakeholders. Similar to the P/E ratio, a lower EV/EBITDA represents a cheaper valuation, all else equal.

Luckily, the EV/trailing EBITDA ratio can be found on the Yahoo! Finance Key Statistics page, so we don’t have to dig through financial statements.

.... The median EV/EBITDA ratio for the S&P 500 is currently 11.4x. If we own a stock with a much higher multiple, there better be a really good reason.

Comment: So ... low EV/EBITDA is preferred. See samples above. Also known as the Enterprise Multiple

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Some other links:

• EV/EBITDA Screener
• PDF Article
• The Single-Best Metric: EV/EBITDA