From time to time, I check in and display items that are circulating in Wall Street circles and blogs.
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Long-term market and economic trends.
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Additional details about what you think is undervalued or overvalued.
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Links to great explainers of concepts.
**All information as of February 15, 2023.
As SPY and QQQ plummet to all-time highs, analysts and commentators are focusing on whether the stock is entering overvalued bubble territory, is still reasonably valued, or is it still on its strongest since October of last year? Despite the rally, the question remains whether the stock still has room to rise as 2024 progresses. .
Like everything in life, it depends on your perspective. Let’s dig a little deeper.
Honestly, on an absolute basis, it’s hard to find a valid argument that the broad stock index is undervalued at the moment. This is partly due to the rise we have already seen, but also because the underlying components of the index are widely divergent from each other in terms of valuation.
Many analysts now consistently manage the seven Magnificent companies (MSFT, AMZN, NVDA, META, TSLA, GOOGL, AAPL) as their own category, and the other 493 companies as their own category. Masu. This is because of how unrelated these companies are to each other.
The best argument I’ve ever heard for buying stocks cheap is actually basket spread trading. Buy a basket of other 493 stocks, sell Magnificent 7, and then let them play. The aim is to return to a more reasonably balanced ratio between the groups, but the main risk is that these Magnificent 7 continue to dominate the market and bully the rest of the market.
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The argument that the value of the stock is fair is much more interesting and debatable. First, the P/E ratio shows that the current value of the S&P 500 is only one standard deviation above its long-term average. Nothing extreme.
Additionally, as we saw earlier, if you extract the seven largest tech companies, the remaining index components are a reasonable 18x.
Taking a closer look at Magnificent 7, NVDA (now the king of all) actually has solid reasons behind its rise. You can see that while the stock price has exploded, so have NVDA’s revenues. This suggests that the rapid rise is based on actual gains rather than speculation or sentiment. As long as NVDA continues to meet expectations, its market cap and trajectory are within reason.
Unlike finding reasons why stock prices are low, Chicken Little is full of chart crimes that suggest an impending crash is on the horizon. You can make anything similar by adjusting the axis scale and starting point of the graph enough.
Here are two of my favorite criminals. See if you can guess why the reports of the market’s demise are so exaggerated.
Overall, it seems like there are few things that are cheap at the moment, but the S&P 493 is relatively cheap compared to the rest of the Magnificent 7. However, just because something is expensive doesn’t mean it will stay expensive for the foreseeable future.
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What are your thoughts? Have a question? Comment?
Reach out!Maybe I’ll do a full post on this topic or post it as a Q&A
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