What The Market Wants: Where Are Valuations Now?

Today’s market was strong with lots of volume to open the week and close the quarter.  The strongest index of the day was the Russell 2000, up 1.8%, followed by the S&P 500, up 0.8%, and the NASDAQ, up 0.7%.  NYSE volume was a strong 810 million.  The S&P 500 squeaked out a narrow 0.7% gain for the month, which is better than the NASDAQ’s 2.5% drop and the Russell 2000’s 1% drop.  The biotechnology ETF, IBB, delivered an exceptionally strong performance, up 3.1% for the day after a dreadful month.  The quarter was led by the S&P 500, up 1.4%, with the Russell 2000 up 1.0% and the NASDAQ up 0.8%.

To what do we credit such strong close to a relatively flat month where strong openings were typically followed by very weak closes?  Last week, despite many good starts, only Large-cap Value ended the week positive, gaining 0.16%; Small-cap Growth dropped a nasty 4.28%.  President Putin’s call to President Obama gave hope for a diplomatic settlement to the Ukrainian issue.  Or, one could argue that Fed Chairman Yellen’s remarks that the Fed remains short of its employment and inflation targets created a feeling that the Fed might taper a bit more slowly, charging today’s market.  Of course, EOQ window dressing might have been the real trump card.  Regardless, we are once again nearing various index highs with the strength from today’s rally.

Reaching new highs might once again raise the issue of valuation in Q2.  We completed our quarterly analysis of Sabrient GARP ratios (growth at a reasonable price) to measure valuation.  You might recall that the Sabrient top 300 GARP stocks reached a historic low in February 2009, as did Sabrient’s 1000 best GARP stocks.  The indices are composed of a nearly 2500 stock universe that includes all publicly held domestic companies that have at least three IBES analysts following them. 

The forward P/E of the Sabrient 300 averaged the historically low figure of 6.46 on March 6 of 2009.  By May of 2011, it had reached a high of 9.37 before the summer pull back in 2011.  By early 2012, it had risen again to nearly 10 with an average of 9.44.  Once again, it fell back reaching 7.75 in the summer of 2012.  From that low, the resulting strong market drove it to 10.69 February 2013.  It had been relatively stagnant since that time until moving above 10 in late 2013 and now reaching its post 2009 high of 11.84 on Friday.  Perhaps 12 by todays close.