Are these stocks really cheap?
The Business Times front page headline this morning was mundane enough: "Blue chips hover close to lows in jittery market". But what was written underneath in the subheading was far more interesting: "Price-earnings ratio of ST Index stocks just 11 times; some sense buying opportunities". Our contention is not that the Business Times got it wrong. By P/E ratio these stocks may be cheap - and at 11x, it is cheap! But it is not the only measurement to use. Let's investigate this further.
Price-earnings multiples measure how many years must pass for a company to earn per share what it costs per share. But while that tells us something about how much of future earnings have been priced into the stock, it tells us nothing about whether we are getting value for money. And that has to be the ultimate measurement of any purchase, including stocks. The price-book ratio does this, and according to Reuters there are lots of expensive stocks around:
If we are looking for an understanding of performance, there is another measurement better than price-earnings: Yield. It answers the question of how much we get paid to simply own the stock. According to the DBS website, you get 0.825% interest (in other words, pittance) for every S$10,000 you invest for 12 months. So, only stocks that pay more than this are of interest. And according to Reuters, the yield also leaves to be desired. High yielding stocks are often problematic ones.
There is an even better way to measure performance, and that is the price-free cash flow ratio. How much cash is the company generating per share, compared to what it costs per share. And using this measurement, there are many many stocks which come up with zero or negative numbers. In other words, they are not throwing off excess cash. But there are also some good performers:
Having now gone through this exercise, our broad sweeping statement that's not to be taken as investment advice is this: stocks are indeed historically cheap. They are not a steal, but they are at levels where one might now say, when will these stocks ever get cheaper?
Mark Laudi, who owns SIA shares.
ArchivesPrice-earnings multiples measure how many years must pass for a company to earn per share what it costs per share. But while that tells us something about how much of future earnings have been priced into the stock, it tells us nothing about whether we are getting value for money. And that has to be the ultimate measurement of any purchase, including stocks. The price-book ratio does this, and according to Reuters there are lots of expensive stocks around:
DBS: 1.24xEven to buy S$1 worth of value in DBS, you have to pay S$1.24 for it.
SIA: 1.25x
Jardine Cycle & Carriage: 2.1x
Comfort Delgro: 2.2x
SingTel: 2.9x
Dairy Farm: 17.8x
StarHub: 72.3x
If we are looking for an understanding of performance, there is another measurement better than price-earnings: Yield. It answers the question of how much we get paid to simply own the stock. According to the DBS website, you get 0.825% interest (in other words, pittance) for every S$10,000 you invest for 12 months. So, only stocks that pay more than this are of interest. And according to Reuters, the yield also leaves to be desired. High yielding stocks are often problematic ones.
There is an even better way to measure performance, and that is the price-free cash flow ratio. How much cash is the company generating per share, compared to what it costs per share. And using this measurement, there are many many stocks which come up with zero or negative numbers. In other words, they are not throwing off excess cash. But there are also some good performers:
UOB: 7.39 cents per shareIn short, stocks may be cheap on a P/E basis, but you have to look at other measurements to gain an accurate picture.
Jardine Matheson: 3.9 cents
Singapore Airlines: 2.57 cents
Having now gone through this exercise, our broad sweeping statement that's not to be taken as investment advice is this: stocks are indeed historically cheap. They are not a steal, but they are at levels where one might now say, when will these stocks ever get cheaper?
Mark Laudi, who owns SIA shares.
Labels: comfortdelgro, Dairy Farm, DBS, Jardine, Jardine Matheson, Singapore Airlines, SingTel, StarHub, UOB
January 2006 February 2006 March 2006 April 2006 May 2006 June 2006 July 2006 August 2006 September 2006 October 2006 November 2006 December 2006 January 2007 February 2007 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 September 2007 October 2007 November 2007 December 2007 January 2008 February 2008 March 2008 April 2008 May 2008 August 2008 September 2008 October 2008 November 2008 January 2009
