Happy New Year
For one reason and another this is my first post of 2016 and my hope is that the readership will continue to enjoy and give investors things to think about when reading the articles that I publish. I will shortly be posting a summary of shares that I will be looking at in the near future, and if recent declines continue then there is a good chance that there will be more on my list than there has been in 2015.
As regular readers will probably have guessed I feel pretty negative regarding near term prospects for a number of reasons; with this in mind and to start the year off I have produced a short review that highlights some of the areas of concern that I flagged up through last year.
- Rising Credit Spreads in the US
- Decline in prospective returns from the FTSE-100
- 200 Day Moving Averages
- Rising payout ratios
More than enough to make you a little nervous
My view is that the PE ratio alone is far too volatile as a measure of long term valuation, whilst the PE10 and long term dividend yields may suggest the FTSE-100 is around fair value.
Other measures suggest that investors are again overpaying – with Price to Sale, Price to Book Value and Tobins Q at levels last seen in 2008 prior to the Financial Crisis.
Here is some of the best commentary on Price to Sales (Revenue) that you will find, its from Scott McNealy who was CEO of Sunsystems when the stock was trading at 10x sales…
“But two years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”
The shares subsequently fell back to around $9.50 by 2002
The full interview is on Bloomberg Business
Meanwhile on Twitter RBS gives us a nasty warning……
— The Telegraph (@Telegraph) January 12, 2016