As of September 2018, I now also include an alternative version of CAPE that is somewhat different. As documented in Bunn & Shiller (2014) and Jivraj and Shiller (2017), changes in corporate payout policy (i. e. share repurchases rather than dividends have now become a dominant approach in the United States for cash distribution to shareholders) may affect the level of the CAPE ratio through changing the growth rate of earnings per share. This subsequently may affect the average of the real earnings per share used in the CAPE ratio. A total return CAPE corrects for this bias through reinvesting dividends into the price index and appropriately scaling the earnings per share.
Nonetheless, the reality is that while Shiller CAPE has little predictive value in the short term, its correlation to market returns is far stronger over longer time periods; Shiller CAPE shows its strongest correlation to nominal returns over an 8-year time horizon, and is actually most predictive of real returns over an *18* year time horizon… supporting Benjamin Graham’s old adage that the markets may be a voting machine in the short run, but they are ultimately a weighing machine in the long run as valuation eventually takes hold. On the other hand, over very long time horizons (e.g., 30 years) Shiller CAPE once again begins to lose its value as other longer-term structural market factors take hold.
The fact that Shiller CAPE is a strong predictor of market performance in the long run (but not the “ultra” long run, nor the short run) suggests that the valuation measure does have use, but only if applied in the correct contexts. For instance, while all this suggests that Shiller CAPE may be a poor market-timing investment indicator, clients who are retiring and exposed to “sequence-of-returns” risk over the first half of their retirement may benefit greatly by adjusting their initial spending levels in light of market valuation at the start of retirement.
Thank you Ono for this excellent information. I had never heard of this before.
Am I the only one getting anxiety from Apple's meteoric rise? I'm long shares-only, but considering selling a small portion to raise some cash for what I'm assuming will be a nice toilet flushing of the share price sometime in 2020. We've been through it so many times before that I expect it to happen again in 2020. Expectations are getting high for services and the 5G iPhone; lots of time for that narrative to change next year.
I'd rather have anxiety about Apple's meteoric rise than over it falling like a broken elevator.
Ono beat me to it; Despite its "meteoric rise," Apple is still trading below the S&P 500 average, i.e., still priced like a public utility.
This doesn't stop the dummies on CNBC for calling it expensive. That incredibly annoying Andrew Ross Sorkin (why would an investment channel have an anti-business guy on during prime market hours?!) had some guy on with his top stocks for 2020 list, and was blathering about Apple's "market cap." That's how you spot a charlatan. Who gives a shit about stock price X total shares? When has that ever been predictive of anything? You'll never see Ono's P/E point on CNBC. I'm generally not a big fan of P/E's for individual stock valuations, but if you're going to call a stock overpriced, what metric do you use (especially in an era of Chipotle and Tesla)?
I have zero TV programming experience or training, but I am confident that I could develop a show right now that would pull CNBC's best ratings. If they were trying to get bad ratings, I don't know what they would do differently. BTW I am a cord cutter, but Charles Schwab's Street Smart Edge software gives me a free stream of CNLSD...
JD. I agree with you here but this run and this bull mkt in general is giving me pause. I’d like to hear from you how you would value tapple which metric would you use to assess overvalued.
If you could find a metric and you became convinced we were way past it , what would you do, sell the stock and wait., use options etc. I know we all have different situations risk tolerance etc. but would like to hear the res of the board Chime in.
Post by Luckychoices on Dec 16, 2019 18:16:23 GMT -5
I'm guessing I'm as pleased as anyone on AFB to see AAPL doing so well...but over on Seeking Alpha, the boo-birds and fear-mongers are out in force. A recent article posted there, Why Apple Stock Could Drop To $225 In 2020 by Crispus Nyaga, is a great example. Among other sky-is-falling pronouncements is this phrase:
Apple (AAPL) has had a successful year. Its stock is up by 71%, making it the best-performing FAANG stock. Apple has also outperformed the S&P 500 index and the S&P 100 information technology index.
OMG, up 71% in one year? That's way too fast! AAPL must be headed for a crash!! /s
Actually, if you look at today's closing price of $279.86, it's up by more like 77% for the year. But, no matter. Let's not forget that AAPL's 2018 ATH was over $230 before the big drop down to the low $140's. So all the ramping up in share price before October of this year was recovering to approach last year's ATH. The share price is actually up more like 20-25% over the 2018 ATH. Still pretty nice but not ridiculously huge.
So what's the author's Final Thoughts?
I have been fortunate to have invested in Apple for a few years now. At the same time, I have been critical about the company for many years. I believe that Apple has missed many opportunities as it continued to rely on iPhone revenue. For example, I have never understood why the company failed to diversify its revenue by expanding to offering enterprise services like cloud. I also criticized Apple for not having a cheap smartphone in its lineup as it started expanding to the services segment. It seems the management listened as the company is expected to launch a $400 phone in 2020.
As I mentioned before, I have exited my long position in Apple and I have decided to short Apple with a small portion of these profits. The main reason is that I expect Apple to see slow growth in the coming year. Remember, Apple’s service revenue grew by just 18% in the most recent quarter. This is not a very good growth for a company that is valued at more than $1.4 trillion. Also, I expect services to grow a bit faster in 2020 as Apple adds revenue from the new services. As I have explained, I expect this growth to halt in the second half of the year.
To be clear. My short position on Apple represents the smallest part of my portfolio. My target is for the Apple stock to drop to the important support of $225.
So there you go...he's shorting AAPL. And he may do well with his short, who can say? Certainly not me. But I don't believe he'll do nearly as well as those of us who have ignored this type of analysis for years and merely held our shares. Perhaps those who combine holding shares with options or some other method have done even better than us; but I'll never know because I'm risk adverse and can't abide the idea of losing investment money even if I could possibly make a very nice profit if I were successful.
In any case, I love seeing the enthusiasm on AFB these days and cheers to the AAPL Longs!!
mercel: It's been a long strange trip - good to see you're still around (and in AAPL -my assumption).
May 10, 2019 12:48:32 GMT -5
Zeke: Long time no see. Nice to see familiar names still here.
Mar 25, 2019 14:42:52 GMT -5
sponge: Regarding the future of VR, I think it will be huge. I was a gamer when I was in college. But as an adult I lost interest. Last fall I flew up to visit my son at college and check out his new Vive set up. After playing with it for the weekend, I was
Apr 29, 2018 15:25:17 GMT -5
galleybob: thanks for your answer. I will copy and send to her
Nov 7, 2017 15:32:18 GMT -5
rickag: So since Jan 28th 2015 AAPL is up from 117.27 to 157.21
Aug 21, 2017 20:09:43 GMT -5
artman1033: VXAPL = 29.21 AAPL = $117.27 AFTER EARNINGS
Jan 28, 2015 14:54:46 GMT -5
artman1033: VXAPL = 44.94 AAPL = $110.39 BEFORE EARNINGS
Jan 27, 2015 11:12:53 GMT -5