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Good morning everyone and happy Saturday. I hope everyone has had an amazing and blessed New Year. I hope we all have a lovely weekend. We are coming upon 4^(th) quarter, end of year results on the market. We are currently at 6,950 on SPY VOO SP500 or 26x earnings. \[Estimate was 269 by analysts a few weeks ago.\] The world regards the SP500 as the stock market so when I make comparisons and relate investments I use the index. The tools and ways I view things are from trading since 1994 before I was even 14! There is no rule book, no one has taught me, but experience, blowing up my account in the year 2000 has shaped the way I trade today. Earnings season is the best time to add/subtract stocks to watchlists as well as portfolios. It is the best time to dump heavy bags. Pre Covid, 2020 the SP500 generally did not trade over 19x… Pre 2000, SP500 traded 15-16x, after 2010 it was 17-18x and eventually by 2019-2020, naturally we moved to 19-20x. So we do rerate, the multiplier over time.
Historically before Covid the SP500 returned 8.5%, for this return sales and earnings grew generally between 5-10% on the index. With the gains over the last few years it has pushed the returns near 10%, we have grown sales and earnings near the same amount.
If we earn lets say 270 on the index. Have an amazing 2026, say earnings grows 10% to 297, I am willing to give the index a 21x or 6,237… But it is too early to see what 2026 full year earnings are so that is why earnings season is critical.
Personally, I believe the market is inflated and should never trade beyond 21x, that doesn’t mean we will crash, fall or even that I believe we will crash or fall, but I am in a lot of cash until the market moves to more fair value….
Let us say that earnings and sales grow 5%, instead of the 10%.... Then we should trade at 20x…. 270 x %5 growth = 283.50
283.50 x 20x = 5,670
See what can happen?
Now I am not saying that is what will happen but that is why I am so careful. Historically, we do not trade above 20x, unless there is some extraordinary reason. The stock market is a live auction with bidders and sellers. Market, daily sentiment decide what and where the market will go. When decided to add/sell a stock I use the index to decide if my stock is cheap or not, and attach my own multiple based on a ton of factors.
From Q3 earnings we had 12% earnings growth and 8% sales growth, the market traded about 25x.
This means, if the company you are invested in, had earnings growth 12% and sales growth 8%, and trades under 25x, then you are getting a discount…
If your company is growing 5% in both sales and earnings, maybe your company should trade at 15-20x etc…
Once again no one taught me this, there is no rule, but this is the only way I can think of, myself to value companies..
I rarely pay over 60x for any company, that is a personal choice… and if I do, they need to grow sales at 30% and earnings at 20%, that is personal preference….
I get these numbers because a great company on SP500 grows sales at 20% and earnings at 15%, so if you want to trade at 60x you better do better than the better SP500 companies…
I hope this helps everyone… So when you have stocks, or want to add or sell something, that is what I use to decide…
I have 33 bags to deal with and will decide what to do based on earnings. Have an amazing weekend!
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