The market took a decent dive today because of all the unrest in the Middle East, the continuing drop in housing prices, and such. But what does it all really mean, is the stock market too high and this is a simple correction, or is the market being unfairly punished? I ran a simple PE analysis on the Dow Jones Industrial to see if I can get a rough idea on the value of the “market” as a whole.
Why the Dow Jones? It’s a widely followed index, many people consider it a good proxy of the market (that’s a topic for another post) and most importantly the index only has 30 stocks making it much easier to analyze than the S&P 500.
The Results: The Dow Jones, compared to its historical PE average, is undervalued.
The Analysis: My data is from Yahoo Finance, and is as of Feb 22, 2011. I took the current price, closing price for the day and the current EPS to determine the current PE ratio. I then used Yahoo Finance’s estimates for next year’s EPS estimate to determine the forward PE ratio. The results, speak for themselves; the current PE ratio is 14.93, and the forward PE is only 11.49. Historically, the market is overvalued when the PE ratio is above 18. So, based on the forward PE ratio, we are pretty undervalued. If we estimate the forward PE should be 15, we’re looking at the Dow going up to 15,938 compared to the current 12,220. Here’s the data that I used:
|Symbol||Name||Current Price||EPS||P/E||EPS E (next yr)||Forward PE|
|AXP||American Express Co||44.29||3.35||13.22||4.07||10.88|
|BAC||Bank of America Corp||14.18||(0.33)||(42.97)||1.86||7.62|
|CSCO||Cisco Systems Inc||18.59||1.32||14.08||1.77||10.50|
|DD||E I du Pont de Nemours and Co||54.38||3.30||16.48||4.12||13.20|
|DIS||Walt Disney Co||42.65||2.26||18.87||2.99||14.26|
|GE||General Electric Company||20.82||1.06||19.64||1.62||12.85|
|HD||Home Depot Inc||38.09||1.86||20.48||2.24||17.00|
|HPQ||Hewlett Packard Co||48.23||3.69||13.07||5.72||8.43|
|IBM||International Business Machines Corp||161.95||11.58||13.99||14.44||11.22|
|JNJ||Johnson & Johnson||60.65||4.78||12.69||5.13||11.82|
|JPM||JPMorgan Chase & Co||46.01||3.97||11.59||5.58||8.25|
|KFT||Kraft Foods Inc||31.47||2.43||12.95||2.51||12.54|
|MRK||Merck & Co Inc||32.34||0.28||115.50||3.88||8.34|
|PG||Procter & Gamble Co||64.07||3.67||17.46||4.37||14.66|
|TRV||Travelers Companies Inc||60.53||6.67||9.07||6.16||9.83|
|UTX||United Technologies Corp||83.56||4.74||17.63||6.10||13.70|
|VZ||Verizon Communications Inc||36.00||0.90||40.00||2.62||13.74|
|WMT||Wal-Mart Stores Inc||53.67||4.00||13.42||4.44||12.09|
|XOM||Exxon Mobil Corp||85.44||6.21||13.76||8.10||10.55|
Then if you try to see what the value would be with more realistic PE ratios, here is what you get:
|P/E Possibility||Dow Jones Value|
As we can see, the stock market is nicely undervalued and could be a potential lucrative investment.
All data is as of Feb 22, 2011 and I’m not an investment advisor and you shouldn’t base your investment decision on what I tell you.