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1/6 Thread: What is the market& #39;s valuation multiple?
One of the reasons I was becoming bullish on some of the big tech stocks ~2-3 years ago is some of the them, especially $AAPL was trading at market multiple.
One of the reasons I was becoming bullish on some of the big tech stocks ~2-3 years ago is some of the them, especially $AAPL was trading at market multiple.
2/6 That didn& #39;t make quite sense to me since I thought Apple was clearly a better business than the broader "market".
I now think there was a flaw in that argument.
If I remember correctly, I first came to know about this flaw from one of the pieces by Jim Grant.
I now think there was a flaw in that argument.
If I remember correctly, I first came to know about this flaw from one of the pieces by Jim Grant.
3/6 Grant& #39;s argument was really simple.
The way market valuation multiple is calculated by FactSet/CapIQ can understate the "true" multiple of the market. Let me explain.
The way market valuation multiple is calculated by FactSet/CapIQ can understate the "true" multiple of the market. Let me explain.
4/6 In a simple two stock index, FactSet& #39;s methodology of summing all the earnings and dividing it by market cap can significantly understate the market cap weighted P/E multiple which I believe is much more relevant.
See the image for explanation.
See the image for explanation.
5/6 I don& #39;t have access to FactSet now, but I did some calculation a yr ago to understand how much multiple was understated if earnings were market cap-weighted.
On Feb 17, 2020, FactSet mentioned $SPY NTM P/E multiple to be 20.8x. When I adjusted for market cap, it became 26.3x
On Feb 17, 2020, FactSet mentioned $SPY NTM P/E multiple to be 20.8x. When I adjusted for market cap, it became 26.3x
6/6 This is not an opinion on whether any of the big tech or overall market is overvalued/undervalued.
I& #39;m bullish on big tech in general not because they& #39;re terribly cheap (but yes, valuation is not demanding), but because their businesses are much better than "market".
I& #39;m bullish on big tech in general not because they& #39;re terribly cheap (but yes, valuation is not demanding), but because their businesses are much better than "market".
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