KLE 46: The Price Is Right!

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It’s easy to make money in the stock market: buy low and sell high.

But, that can’t be as easy as it sounds or everybody would be trading stocks all day, instead of working!

Fortunately, all you need to concentrate on, right now, is achieving returns that keep you a step or two ahead of inflation; that means earning:

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We’re half-way there!

Next time, I’ll provide the final two steps; in the meantime:

Task 1: Find the current P/E of the market. Is it a buy? Do not buy, yet.

Task 2: Find the current Intrinsic Value of the market (preferably, using my spreadsheet but check all the figures yourself, by going to the source documents using the links that I provided, above). Is it a buy? Do not buy, yet.

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Name and State (eg John, FL)
What is the current P/E of the market?
Is it a Buy based on P/E? (YES / NO)
What is the current Intrinsic Value of the market?
Is it a Buy based on Intrinsic Value? (YES / NO)

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Reader Comments

Hi Adrian,

I think you missed something in the bullet points for Step 2:

“3. Is the long-term earnings growth rate”

Did you mean

3. [b]g[/b] is the long-term earnings growth


It’s also not clear from this whether you intend for us to use 3.8 as the value for g (giving 7.6 once multiplied by two as in the equation) or to use 3.8 as the value of 2 * g.

I can see from the spreadsheet that you intend to use 3.8 for g * 2.

Thanks for spotting that, Jim. You are also correct that g = 3.8, so 2g is 7.6.

Hi Adrian,

Many thanks for creating such a brilliant KLE, this one is definitely my current favourite!

The figures I plugged in (as at 27th July 2010) are below:

SPY Price: $1064.88
EPS: $66.13
Return: 11%
Growth Rate: 3.8%
AAA Bond Yield: 5.29%

The ‘Price Check’ came out at: $885.57
The ‘RGV’ was: 1.2

So I figured that since the RGV was above 1 then the market was not currently a BUY.

Quick question for you…what if the RGV came out at 1.0, or something real close like 0.99, would they both be BUYS?

Great question, Dan! Are you a “glass is half full” or “half empty” guy? Your honest answer will tell you whether 1.0 (or even 0.8 to 1.2) is a BUY or a SELL / NO BUY. Same with P/E’s of 13 to 17.

BTW: I come up with an EPS of about $82.15 (you came up with $66.13), so my RGV is 0.9.

Hi Adrian,

Thanks for the correction 🙂
I’ve entered the new figure, however, the RGV is coming out as 1.0?

SPY Price: $1064.88
EPS: $82.15
Return: 11%
Growth Rate: 3.8%
AAA Bond Yield: 5.29%

The ‘Price Check’ came out at: $1,100.10
The ‘RGV’ was: 1.0

Dan, the numbers will change every time you download these spreadsheets … in any event, a 10% margin of error isn’t too bad, especially when you have 3 buy indicators to use.

I was way off on my EPS in putting in $52.50, giving a RGV of 1.6 I got the figure from the 3rd tab that says 12 month values and using the last column that say’s 12 month operating earnings per share (top down). The bottom up figure gives $74.98 so there is a big difference. I must be looking at the wrong figures as you all got something different.

Kyle – Try using the first tab, and check the diagram in the KLE [above], which I have updated to show you exactly where I get my figures from. Now, the “current Operating EPS estimate” is just that: a consensus estimate by analysts. You can substitute any EPS that works for you:

e.g. You could go to the first column (C) and add the actuals for the last 4 quarters. The lesson here is that there is no ‘hard science’ … if there was, everybody would be sitting on their rear ends all day getting rich from stocks, and nobody would be working!

But, if you use all three ‘buy signals’ as guides (there’s another one to come in the next KLE), and then ‘ride the wave’ (see the KLE after the next) you significantly reduce your risk.

Ok, I was able to get this working, but the numbers I see on Tab 1 are only for quarters, not the annual values. They are just on the 3rd tab (and I see the top down and bottom up) for the entire year estimate.

With the AAA bond yield at 4.72 right now, using either the “bottom up” or “top down” EPS I get an RGV of .9 – a buy signal.