One of the godfathers of long-term, value-based market analysis, Andrew Smithers of Smithers & Co., foresees a 10% rally in the S&P 500 as cash-rich companies use recent weakness to buy back their stocks.And this will be a magnificent selling opportunity, Smithers says.
Using a “normalized” earnings analysis, as well as “Tobin’s Q” (a measure of replacement value), Smithers thinks stocks are still 40% overvalued. He thinks investors should hide in cash until prices are lower.
Smithers’ valuation analysis is similar to those of Yale Professor Robert Shiller, GMO’s Jeremy Grantham, John Hussman, and many others.
In a recent report (quoted by Bloomberg), Smithers also took the opportunity to get in one of his patented barbs at brokerage analysts, ridiculing them for always finding a way to say it’s a great time to buy:
“There are widespread claims that the U.S. stock market is attractive… While foolish, these views are common. The risk that I see for those who have to take a short-term view is that their relative performance will suffer in a rally and that this will drive them to buy if the market does rally which, given the bad medium-term outlook, would amplify their poor performance.
“It is common to find that investors, often supported by ill-judged comments by investment bankers and financial journalists, try to value shares on the basis of current profits. This is, of course, very foolish as it means that they undervalue companies when profits are low and overvalue them when profits are high—as they are today.
“The U.S. market was more overvalued in 2000 than ever before,” said Smithers in the report on Aug. 15. “It has yet to become undervalued and will naturally do so at some stage. The bear market which started in 2000 is likely to be a long one.”
Here’s a recent chart of Robert Shiller’s cyclically adjusted PE ratio, which suggests that stocks are still about 20% overvalued.
[credit provider=”Professor Robert Shiller” url=”http://www.irrationalexuberance.com/index.htm”]