Hey Everyone!
I'm a hedge fund / PE investor, but currently serving as a CFO of a portfolio company in technology.
Out of the blue, I posted back of the envelope stock market analysis on TikTok last week and absolutely blew up. I've been making more TikToks for fun as a hobby during the quarantine the past week and it's nice to educate a generally younger audience that is uneducated about wise investment strategies especially during a time like this.
I wanted to post my analysis here, especially since I've loved mostly lurking on Reddit for over 6 years! And I'm know I'll get much more educated conversation and feedback here vs the 60-second videos I'm posting there and youtube. I've always been a pretty out-of-the-limelight lurker on the internet but the random virality has brought me out of my shell for a bit - hope I don't get destroyed too badly.
I have an excel spreadsheet and charts explaining but let me try to post my current view as of this weekend 3/21/20 but let me try to write it in a post. This is all analysis on S&P 500 valuation now.
I spread Price vs TTM S&P EPS historically, so basically your basic TTM P/E ratio. Doesn't tell you much and backwards-looking right? Then I spread Price vs Average Forward 12-Month TTM EPS and it still doesn't look very predictive. But when I spread Price vs Average Forward 36-Month TTM EPS, it actually looks pretty predictive of a "bottom" and that stocks are cheap enough to buy. The conclusion here isn't that revelatory - if you can predict average earnings over the next 3 years, you know whether stocks NOW cheap or expensive.
I took a closer look at average earnings through the 2008 Financial Crisis Recession, and we averaged ~36% lower earnings from peak to recovery. When the market crashed back then, if you had estimated this amount for the following 3 years, you would've seen stocks cheap at 12-15x this [P / F36 EPS] Ratio.
Where are we at now as of market close on Friday 3/21/2020 (S&P500 at $2,309) implies a a 15.0x multiple on average forward 36-month earnings if we average 9% lower earnings over the timeframe. Given the shutdowns and furloughs and my anecdotal feedback from my private equity colleagues drawing revolvers and laying off workforces, this seems to very much underestimate the impact. Not only has the economy shut down more drastically and in a quicker fashion than it EVER has, I'm increasingly concerned about an extended recovery even with a vaccine, as folks have to go back to work after being jobless. And that's not even talking about the Fed not having room to lower interest rates or the higher debt burden we'll have coming out of this.
If we assume an average of 35% lower earnings over the next 36 months (the same as 2008 Crisis), and use 15.0x multiple on this, it would imply entering a fair-value bottom territory when the S&P starts crossing $1,650.
Yes, I know as good as anyone that no one can predict these crazy markets or the future etc etc. Just a best guess analysis at this point in time. I am actively recommending to friends and folks that it's good to start lightly Dollar Cost Averaging (DCA) in NOW in case we recover quicker, and to start DCA'ing in heavier and heavier as we cross $2,100 and $1,800.
Thoughts?
Submitted March 21, 2020 at 08:15PM by justinuhoh https://ift.tt/2wvIoGD
