By: Larry MacDonald
Stocks are in bargain territory going by Tobin’s Q Ratio, an indicator that tracks the ratio of market values to replacement costs for companies listed on stock exchanges. According to a recent Argus Research newsletter, the most recent level for Tobin’s indicator stood at 0.68 (based on second-quarter Flow of Funds data from the Federal Reserve) for U.S. stocks, down noticeably from the all-time high of 1.85 in 1999.
The long-term average (since 1955) for Tobin’s Q is 0.75, so stocks have become relatively cheap. But Tobin’s Q is not good at timing rebounds. In the past, there have been occasions when undervaluation got worse before it turned around. Indeed, in 1982, the Q ratio fell all the way to 0.26. Still, stocks are currently inexpensive going by historical norms.
2 Responses to “ Are stocks bargains now? ”
i hold 20 stocks and all 20 have growing ROEs; unfortunately most of them have fallen in this manic selloff; i would agree that there are many cheap stocks out there; 18 of my stocks have p/e’s under 10
By Paul on Sep 25, 2008
PE and book value is not meaningful in this current financial crisis. Many stock are trading at low PE and/or below historical fundamental/book value due to difficulty in refinancing it’s debt (forcing sale of assets) and/or customers leaving for a stronger competitior.
By John on Sep 28, 2008