The indices in Europe, and America are down around 4 to 5%, and the question is if we hit bottom. First let’s look at the overall picture for the past year.
It looks like the market is about to hit another low. I think it will. I have an indicator and it is telling a picture similar to the following.
The indicator is mapped to approximately the beginning of January. What the indicator tells me is that there is another drop about to come. Thus I suspect we will have another 3-5% drop from the lowest of the lows. The total time for this indicator is about a year meaning that around November the market will probably still be lower, but on an upward trend.
Of course my predictions rely on typical situations. Or at least typical for what we are going through right now. It could be much worse and that has me concerned right now. It could be a 2000-1 situation. Though even then there were good stock buys.
So should you buy now? Or have bought this week? Absolutely, but only nibbling, and what is an absolute bargain. Are there bargains? Sure, but there are also what I consider false bargains.
On Fast Money today everybody was talking about how Apple is a value play and that it was ok to buy at 120. I say no, and here is why. My value calculations come to the following numbers.
The stock price is around 125, and the PE from last earnings is 31.81, and forward earnings is 24.26. This is not a bargain. It might be a bargain in a strong upward trending market. So why did Fast Money say Apple is a bargain? Simple, Apple has a past historical PE of 41. Thus Apple is a bargain. However, think of the context. Apple was decimated and it was only after 2000 that it got going again. Thus a PE of 41 is in my opinion an overvaluation.
Though Apple is not the worst overvaluation. RIMM is much worse. It has a past historical PE of 70 and is trading at current PE of 80.19 and forward PE of 40.27. Not a bargain at all.
What is a bargain? Swiss Re. A Warren Buffett buy. I was looking at Swiss Life, but thought, hey if Swiss Re is good enough for Warren it’s good enough for me. Is Swiss Re a bargain? Oh yeah!
The red blocks cover my positions, so don’t ask. Am I profitable? (Oh yeah) Swiss Re has a forward earnings of 11.68, which is a lower earnings from the past. The PE is 6.51, with a historical PE of 11.43. So if Swiss Re makes its lower targets and trades at its historical PE then a fair price would be 133 CHF, doubling my share price. And if Swiss RE were to exceed its earnings to the previous year the fair share price would be 170 to 153 CHF. And if Swiss RE were to actually grow its earnings from the previous year it is +200 CHF.
This is not to say that the share will go up like a rocket. What I am trying to point out and why Warren Buffett bought the stock is that there is more upside benefit than downside risk.
Let’s compare that to Apple. If Apple meets its earnings would have a fair price of 211 USD. If the share price is 120 then a 100 USD gain sounds good. Though the fair price is based on a PE of 41, and it requires that Apple meet a 31% earnings growth. In a slowing economy this is a risky bet. So what would be a fair share price for Apple assuming current earnings and historical PE? About 148 USD. That’s an entire 28 USD for an entire year, which is a net gain of say 23%. Sounds ok, right? Yeah, well this is if everything goes to plan and people are willing to pay historical PE. As you can see right now the market is not willing to pay historical PE.
So now comes the question should you buy? Yes, absolutely, but only those shares that are bargains and there are bargains.
NOTE: I will not disclose my holdings other than Swiss Re, so please don’t ask. I also will not talk down any stock so that I can buy it. That means I will not be buying Apple. Ok maybe I would, but it would have to trade around 40 to 50 without a split. And if I did buy Apple I would disclose that.