Looking at a long-term chart of valuation multiples, we can see that the market has currently priced in some pretty hefty premiums for companies across the board. The average price to earnings (P/E) ratio for companies on the S&P 500 has increased at a staggering pace, with no signs of stopping.
Relaxed monetary policy, cheap money, low interest rates, and expectations of improved growth prospects moving forward have provided the catalysts necessary to keep this most recent bull market going.
With the bulls charging forward, and valuation multiples following suit, the question of how many value opportunities still exist, and in what industries, keep some investors up at night.
Value investing, or the art of buying a stake in a company which is priced below its intrinsic value, is easier said than done. Countless books on how to go about placing a valuation on the equity portion of a business and determine what the true intrinsic value or break up value of a company describe in detail what an investor must do to determine he or she is getting a screaming deal.
“Buying 50-cent-dollars” as described by investing guru Benjamin Graham, or buying companies which are worth less than 50% of their assets, is becoming increasingly harder to do as investors continue to increase their willingness to pay more companies on a relative basis, increasing the price at which an investor can go about purchasing shares of most companies in most industries.
Value investing has seemingly given way to the momentum trading strategies of growth-oriented investors in recent years, and it is unlikely that this trend will reverse anytime soon. Value investors will have their day, however, when the next bear market arrives and valuation multiples return to reality.
Until then, good luck.
Invest wisely, my friends.
