Stocks Are Not Cheap——Drilling Down On The Real PE Multiples

How many P/E ratios are there? Let me count the ways.

  1. As companies report for tax purposes (the real P/E).
  2. As as trumped up by mainstream media (the pro-forma P/E also called operating earnings).
  3. As further trumped up by mainstream media (forward estimates, typically wildly off) based on pro-forma PE ratios.

I am quite sure I have missed other creative measures spewed out by market analysts promoting the message “stocks are cheap”.

However, let’s dive into an analysis of the above.

Russell 2000 P/E

Russell 2000 2016-03-30

As of the 2015, the as-reported P/E of the Russell 200 index was 3,474. It is now 691. But all the reports are not yet in.

Meanwhile forward estimates, throwing out all companies with negative earnings is 17.17.

Hmm, that creates another ridiculous measure: Throw out anything horrific, and average the rest, all pro-forma of course.

Wall Street Journal Estimates

PE estimates

The Wall Street Journal estimates the P/E of the Russell 2000 is negative. The Journal politely describes that as “nil”.

Somehow “nil” sounds better than 3,474!

And check out the others. Specifically note the S&P 500 as reported P/E is 23.53 whereas the “forward looking estimate hook” is 17.55.

The fact of the matter is 17.55 is not cheap. But willingness to pay 23.53 borders on the absurd.

23+ ranks with 2007, 2000, and 1929 in degree of absurdity.

This is nothing more than a central bank sponsored “greater fools game” in which market participants are willing to chase bond yields further down the negative interest rate rabbit hole, and P/Es further into the stratosphere.

Mike “Mish” Shedlock