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1/6 Thread: What is the market'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'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'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'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'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'm bullish on big tech in general not because they're terribly cheap (but yes, valuation is not demanding), but because their businesses are much better than "market".
I'm bullish on big tech in general not because they're terribly cheap (but yes, valuation is not demanding), but because their businesses are much better than "market".
