Skip to main content

Stock Market Valuation - Shiller PE

Shiller PE is a better measure of Stock Market Valuation
 

The traditional PE takes the earnings of the trailing 12 months into account while the Shiller PE uses 10-year data, thus eliminating the possibility of fluctuations.

 

The broader market indices have fallen in the recent past, but the commonly used valuation ratios, such as the price-to earnings ratio (PE), didn't mirror this fall. This is because earnings per share (EPS), the denominator in this ratio, also came down during this period, thus not allowing any fall in the share prices to be reflected in the PE ratio. This is why experts suggest that investors should look at alternative ratios such as the Shiller PE ratio.

 

The Shiller PE ratio has been developed by Robert Shiller, winner of the Nobel prize for Economics in 2013. The main advantage of the Shiller PE ratio is that it eliminates the fluctuations in the regular PE ratio caused by variations in profit margins during business cycles. The regular PE uses the trailing 12 months earnings per share (EPS). Since companies usually report high margins and earnings during upcycles, the regular PE will be low during cyclical peaks, sending out buy signals. Similarly, during margins and earnings crash during cyclical bottoms, the regular PE will be high, and give out sell signals. For example, the share price of Cairn India almost halved in the recent past, but its PE doubled because of the fall in EPS. You can also see a similar situation with stocks of public sector banks such as PNB.

There is another reason why we should use seasonally adjusted PE for cyclical sectors. Last year, some cyclical companies reported losses, so the normal PE will not work (PE will be negative)

Shiller PE, on the other hand, is calculated based on the EPS of the last 10 years. To make historical EPS values comparable to the current share price, the same is adjusted for inflation. Since this includes periods with high margins and low margins, the average EPS is cyclically adjusted. This is why Shiller PE is also known as CAPE ratio (cyclically adjusted PE ratio) or PE 10, because its based on 10-year data.

How is the Shiller PE placed now with regard to Sensex valuation? While the broader market, on trailing PE basis, is still in a reasonably valued zone, it is in an undervalued zone going by Shiller PE. The Sensex's trailing 12 months PE is placed at 18.47, just below its 10-year average of 19.26 and, therefore, can be considered to be in a reasonably valued zone. On the other hand, its latest Shiller PE is placed at 16.40, significantly lower than its 10-year average of 24.03.

The Shiller PE is also closer to its historical bottom. While trailing PE is 78% above its bottom, Shiller PE is just 28% above.

Though Shiller PE generates better results while analysing the cyclical companies, investors should not treat it is as absolutely fool proof. Just like the regular PE, Shiller PE should also be seen in relation to a company's earnings record. Earnings trajectory is very important. The counter may look cheap on PE, but will go down further if the earning keeps on falling. Also, investors must remember that when using a new tool such as the Shiller PE, consistency in its application, across market cycles, is a must. "If investors are using Shiller PE in a bear market, they should use it in the bull market as well.

-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saving Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

-----------------------------------------------

Popular posts from this blog

Mutual Fund Review: Taurus Tax Shield

    Taurus Tax Shield has seen a turnaround in performance since 2007, but still remains a volatile offering… The fund has seen a turnaround in its performance since 2007 and has delivered impressively during market rallies since then. The portfolio is also more diversified. It contained its downfall to an average level in 2008 but is still one of the most volatile offerings in this category. Bold investors can look at this fund.   Strategy The fund manager invests across the market capitalisation and sectors. The selection of stocks is made on the basis of long-term business prospects and value creation. Fund Insight Launched in March 1996, the fund was a laggard with just two annual outperformances. Concentrated stock bets and high exposure to mid and small caps led to it being hit harder during market downturns. The number of stocks in the portfolio never exceeded 20 and it was not rare to see the top 5 holdings account for around 60 per cent of the portfolio. After b...

Use Mutual Fund SWPs for getting fixed payments

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   Investors time withdrawals optimally to save on tax The systematic withdrawal plan, or SWP, could be called the lesser known cousin of the much talked about and publicised systematic investment plan (SIP). There's yet another cousin — the Systematic Transfer Plan ( STP ). In SIP, you invest a fixed sum of money at regular intervals (monthly/ quarterly) to buy some units of a mutual fund scheme. In SWP, as the name suggests, you do the opposite: You redeem some mutual fund units from your portfolio to get a fixed sum of money at regular intervals (monthly/quarterly/half year/yearly). In SIP, you get a higher numbers of units when the markets are down, and lesser in a buoyant market. In SWP, going by the product logic, you redeem higher number of units when the markets are do...

AXIS Long Term Equity Fund - The Best Tax Saver Fund for 2016

  AXIS Long Term Equity Fund - Invest Online   History:   The open ended mutual fund was launched on December 21 in the year 2009. It is benchmarked against BSE 200 and managed by the fund manager JINESH GOPANI. Initially the scheme was called as Axis tax saver fund but later it was renamed as Axis long term equity fund with effect from September 2, 2011. Nature of investment: As far as asset allocation is concerned, 97.52% of the stocks are equity and 0.02% is debt based. The primary focus of the fund is to invest in diversified equity stocks that have higher growth potential. Total asset size of the fund is in the tune of 4,996 CRORE as of June 30, 2015. Performance: The performance of the fund for one year, 3 years and 5 years are 23.6%, 29.9% and 19.1 respectively which are far greater than 6.4%, 14% and 5.6% benchmark figures. It has also preformed fairly well against SBI magnum Tax Gain (G) and HDFC tax saver (G). The growth comparison is enumerated below;                        ...

IDFC Classic Equity Fund

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   IDFC Classic Equity Fund IDFC Classic Equity is a large-cap equity fund which currently has assets under management worth Rs. 158.52 crore. It was launched in August 2005. The fund is benchmarked against the BSE-200 Index. Performance YTD 1-Year 3-Year 5-Year Since Inception IDFC Classic Equity 0.93 26.61 6.30 1.01 11.65 BSE 200 1.52 17.31 6.00 1.99 12.98 All figures in % as on January 31, 2013; Returns above one-year in CAGR terms ...

Health insurance guide - Part I

Insurance, by definition, is morbid. What if I die suddenly? What if my home caught fire? What if I had to undergo expensive medical treatment? What if something that I thought happened only to others befell me? Insurers, who work with large samples, calculate the probability of such an event and, hence, the possibility of them having to pay out a sum of money to mitigate, to the extent possible, the effects of that disaster. However, the possibility of you undergoing some kind of expensive medical treatment during your lifetime is far more likely than you dying suddenly or your house burning down. Given that costs at private healthcare facilities, where you are most likely to land up, is high, and, doubling every four years 10 months or so, the rest of your money life could easily go out of whack if you had to incur such expenses. Just 12 per cent of India's population is covered with some sort of health insurance. Pared to the bone, for a comparatively small price, health insu...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now