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Stocks are Actually the Cheapest They've Been in DecadesBy
Tuesday, May 24, 2011
With the exception of the bust of late 2008-early 2009, U.S. stocks are now the cheapest they've been in 20 years.
It might be hard for you to believe... But it's absolutely true.
It might be hard for you to step up to the plate and swing... but with history as our guide, that's the right thing to do. Stocks are cheap, and interest rates are low. It's a recipe for gains. Let's take a look...
The classic measures of stock market value are the price-to-earnings (P/E) ratio and the price-to-book (P/B) ratio.
Right now, the stock market (as measured by the S&P 500 Index) is trading at a forward P/E ratio of 13.5... With the exception of the bottom in 2008/09, we haven't seen a P/E ratio that low since 1990-91. And on a P/B basis, stocks are trading at a ratio of 2.3... Once again, except for the 2008/09 bottom, this is a level not seen in 20 years. Take a look:
 So stocks are nearly as cheap as they've been at any time in the last 20 years. But it's actually much better than that...
You see, back in 1990-91, stocks had a whole lot of competition for your investment dollars. Interest rates were ridiculously high... Junk bonds paid 20% interest. High-quality corporate bonds paid 10% interest. And you could earn 8% on a CD at the bank.
Back then, why would people put money in the stock market when you could earn 8%-10% and take on next to no risk? A lot of people did put their money in the bank, so stocks stayed cheap.
Today is a much better story for stocks. Yes, back in 1990-91, stocks were just as cheap as they are today... But today, interest rates at the bank are basically zero. As for corporate bonds, well, Google just borrowed money at 1.25% for three years.
In short, stocks have no competition like they did back then. And that's the crucial thing to understand.
Astoundingly, stocks are an even better deal than what I've described so far...
You see, companies have been hoarding cash... If you subtract out their cash, you'll find many big-name companies are ALL-TIME cheap.
Take Apple, for example. Officially, Apple trades at a forward P/E ratio of 12. That's cheap. But Apple actually has $65 billion of cash (and other investments that can easily be converted to cash) on its books – $65 billion worth!
This $65 billion is not part of Apple's business. When you subtract the $65 billion in cash from Apple's market value, you end up with a single-digit forward P/E ratio for Apple's business.
That is a ridiculous value for the world's best brand name. And it's not just Apple. As Larsen showed you yesterday, many big tech stocks are in a similar position.
That is why I recommended the ProShares Ultra Technology Fund (ROM) to my True Wealth subscribers. It owns the world's biggest technology names... and these names are also trading on average at a single-digit forward P/E (minus cash). Take a look:
This particular fund is double-leveraged... If tech stocks go up 1% in a day, this fund should go up 2%. It works in reverse as well... If technology stocks fall 1% in a day, this fund should fall 2%. But this two-to-one deal is a risk I want to take.
We have zero percent interest rates... single-digit P/Es in the world's biggest brands... and a guarantee of low interest rates for a while... Plus, we have an uptrend in place, which is a safer time to buy than trying to catch a falling knife in the markets.
The circumstances just don't get any better!
Whether you buy this fund or not... whether you buy with leverage or not... you must recognize stocks are as cheap as they've been in decades and interest rates are at record lows. And you must consider buying.
Good investing,
Steve
Further Reading:
Last week, Steve found a sector trading at its cheapest level in years. The last time these stocks were this cheap was 1995... And these stocks soared hundreds of percent in the next few years. Get the full story here: These Stocks Will Soar During Bernanke's Inflation.
"Last quarter, the maker of iPads and iPhones grew its earnings 90% year over year. That's an amazing feat for a $320 billion market-cap company," Frank Curzio writes. "And Apple is showing no signs of slowing down." Find out why Frank calls Apple one of the world's best "bank accounts."
Market NotesAN UPDATE ON THE RESOURCE "MOONSHOT" For more than two years now, we've been following our "moonshot" alert from December 2008, which pointed out the massive potential in small resource stocks.
To recap, as the Fed's inflationary policies push the price of oil, gold, and silver higher and higher, the small resource stock sector could skyrocket in price. We track this idea with the TSX Venture Index, a sort of "Dow Jones of small resource stocks." It's the most widely followed gauge of small resource companies.
From our moonshot alert in 2008 to the recent peak, this index boomed nearly 250% higher. Many individual names have climbed 300%, 400%, even 500%. But as you can see from the chart below, the Venture has suffered a big correction in the past few months... and is close to slicing through its long-term trendline.
The question resource investors are asking now is, "Is the two-year uptrend toast? Or is this just a 'pause that refreshes' like the correction we saw last summer?" Our thesis is that it's going to be a pause... but we can't know the future, so stay leery of this "boom and bust" sector. Until the Venture's soggy price action firms up, the sidelines are the place to be.
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