Panic Aside, Are Stocks Cheap?

The market is pricing in some sort of great doom. You see it in the semis, even the oils. The market caps are not matching the current business prospects and have greatly discounted a wide variety of areas — anticipating a tight fed and subsequent recession.

In Stocklabs we measure valuation data for PE, PE, and PB going back to 1993. I can tell you with certainty — the market is “cheap” based upon current valuations. However cheap it might be, the numbers are not reflecting this great doom that is to come.

The median PS ratio for all stocks in our database is 1.92 — 2015 levels.
Median PE is 13.92, 2008 levels and before that 1993 levels.
PB is 1.41, again 2008 levels.

Here is a visual of the tech sector.

The scale of the drawdown for once upon a time high fliers is nothing less than staggering. Take for example the Canadian bellwether SHOP — once traded at 45x sales during the COVID stay at home fad. Now it trades 6x sales and based upon future sales estimates — it trades with a forward PS of 3.8x.

But here’s the issue with SHOP and many others like it.

Whilst they have over $5b in cash, $1b+ in debt, the market seems to be projecting a massive drawdown in Shopify’s cash horde and bleeding out of its business. If they’re bleeding out now with the general economy ok, what will their cash burn look like in 6 months if GDP is -3%?

Netflix is trading 3x 2023 sales. Consider they traded down to 1.5x in 2008, before thinking it’s historically cheap.

Lastly, INTC is trading 1.45x sales, cheapest I have on record. Back in 2008 it traded 1.79x. AMZN at 2.24x is way above its 2008 lows of 1.32x; but it’s a totally different company now with a large part of their business in cloud services. Speaking of the cloud, CRM is trading 4.8x sales way above 2008’s 3.53x. AAPL is still extremely expensive compared to 2008, 5.7x v 2.4x sales.

And JPM is cheap at 1.13x book. But during the financial crisis markdowns of 2008 — it traded down to 0.5x and traded below 1x book all the way to 2016.

In summary, we are without question pricing in a sharp economic decline. The valuation of the overall market is cheap. However when looking at the monopolies we now have — stocks can go significantly lower if we are to get down to 2008 panic levels. I’d argue against the need to trade down to 2008 levels, since the crisis we have today is less financial and more of the world ending varietal.