A debate is raging as NASDAQ reaches a 15 year high as to whether stocks are expensive, because prices have dislocated from the trend in earnings, or cheap because the last time NASDAQ was at this level the valuation was in triple digits. One way to make NASDAQ look cheap is to compare its constituents with European stocks.
The 12 months forward PE of 21x is as high as it has been since July 2007.
However, compared with the S&P 500, NASDAQ’s valuation is in the middle of the historic range and recovering from depressed levels as recently as October 2014.
The S&P is at its highest valuation in years and is at extreme levels compared with the average of the past decade. One reason for this is depressed earnings, which we discussed here as being a function of low oil prices, which have since bottomed out. The EPS Momentum of the North American Energy sector is -18%, but it is improving from where it was last month. At the same time EPS Momentum across the S&P has also improved, although remains negative at -0.5%.
Over in Europe, which is on the cusp of unleashing QE, valuation is also at extremes, while EPS Momentum is -0.25%.
Compared with the US market, the relative valuation of 0.93x is at high, but not extreme levels, having performed a dive and subsequent recovery between September 2014 and January 2015.
Comparing NASDAQ to Europe, the former looks attractive value as a relative PE of 1.26x is below the long term average of 1.34x and well below exceptionally elevated levels of 1.44x and above.
So while NASDAQ looks fairly expensive on an absolute basis, on relative measures this is not the case (by using median values we are not skewing averages with Apple’s overwhelming market cap). Seven stocks among the index 100 are flagging as exceptionally lowly valued relative to their respective sectors right now and among these SBA Communications has positive EPS Momentum and had a backtested technical signal fire on last night’s close. 68% of the time this signal has fired in the past, the stock has risen an average 7% over the next 20 trading days.