01-28-2016, 12:39 PM
I like to play around with valuation calculations. I started by comparing the stock yield to the bond yield and had some interesting results, but people are much more willing to pay more for bonds than stocks.
In an effort to find the current market valuation, rather than a historic valuation, I looked at the current stock prices compared to various factors. The stocks I looked at are the common stocks out of my shortlist and watchlist.
By far the best correlation was with the market average forward price to earnings ratio.
Taking out the forward price to earnings effect, I looked at other factors. There is a small correlation with Beta (a zero volatility stock will have a 20% premium over an average volatility stock), which isn't surprising. What did surprise me was that there was a negative correlation to yield, while there was no correlation for more fundamental factors such as debt, payout ratio, and earnings growth. I can understand that people are more concerned about a stock as the yield goes up, but you would expect some fundamental factor to contribute to this concern.
In an effort to find the current market valuation, rather than a historic valuation, I looked at the current stock prices compared to various factors. The stocks I looked at are the common stocks out of my shortlist and watchlist.
By far the best correlation was with the market average forward price to earnings ratio.
Taking out the forward price to earnings effect, I looked at other factors. There is a small correlation with Beta (a zero volatility stock will have a 20% premium over an average volatility stock), which isn't surprising. What did surprise me was that there was a negative correlation to yield, while there was no correlation for more fundamental factors such as debt, payout ratio, and earnings growth. I can understand that people are more concerned about a stock as the yield goes up, but you would expect some fundamental factor to contribute to this concern.