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"Low interest rates & large cash balances skew PE ratios"

Bogleheads • View forum - Investing - Theory, News & General - www.bogleheads.org
The "bubblers" (bubble callers) are running amok in 2015. Somebody really smart may have just moved their cheese.

Are some companies in US stock indices cheaper than their historical computation of P/E would suggest ? Is the traditional P/E calculation the best way to value Apple (AAPL) that is sitting on an ocean of cash? The "Dean of Valuation", Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University, offers a new perspective on P/E valuations. From his latest "Musings on Markets"...

"...in 2014, the non-cash PE (by industry) was almost 30% lower than the conventional PE."

" I know that the talk of a bubble gets louder each day, and while there may be legitimate reasons to worry about the level of stock prices, those who base their bubble arguments entirely on PE ratios (normalized, adjusted, current) may need to revisit their numbers. All of the versions of the PE will be "pushed up" by the cash holdings of US companies and the low interest rate environment that we live in."

"...I think we have to separate companies into their cash and operating parts, and deal with the two separately, because they are so different in terms of risk and earnings power."

(Go to "blog")

Good luck in the markets!
Date: Jun 1, 2015   


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