Stocks Are Not Cheap (And 'Growth' Won't Help)

As commodities carnage and credit cracks, talking heads remain intentionally ignorant in there sheep-like mantra to buy and hold stocks no matter what. Ever hopeful that 'growth' and the 'future' will fix any and all over-valuations, even with the current record low number of stocks trading 'cheap', they continues to ignore the facts. As Professor Bruce Greenwald recently told Goldman Sachs, "if a cyclical is trading expensively, it doesn't really matter how fast it is growing because historically growth hasn’t created value for cyclicals. Absent growth, value cyclicals don’t look like good investments."

Stocks are anything but cheap...

And growth hopes won't help...

Cyclical stocks, like auto parts companies, have recently traded at prices that are high by historical standards both in terms of multiples of sustainable earnings and relative to market valuations in general. Thus, investors must be counting on higher future values of these stocks, presumably driven by growth associated with a more robust recovery from the 2008-09 recession.

However, the standard view of some investors is that any company that grows its top line is creating value. And that is just wrong. While it is true that a growing earnings stream - which presumably depends on revenue growth - is more valuable than flat earnings, there is also a downside of revenue growth in the form of investments needed to support that growth. This means that at every moment in time, less of the growing income stream remains distributable.

Further, if a market is competitive like most cyclical sectors are, firms can’t earn more than their cost of capital over a long period of time, and so, growth creates no net value to the original shareholders of most growing firms. The cost of added investment to support growth fully offsets the growth in earnings. It's only in cases where the environment is protected by barriers to entry that a firm can earn above its cost of capital and hence truly create value through revenue growth. That hasn’t typically been the case with cyclicals. And so, if a cyclical is trading expensively, it doesn't really matter how fast it is growing because historically growth hasn’t created value for cyclicals. Absent growth, value cyclicals don’t look like good investments.

*  *  *

Stil want to BTFD?

Comments

[CaptainAmerika]

I'm long propaganda

http://www.philiacband.com/propaganda.html

[realmoney2015]

All of this 'growth' is imaginary. New home production slides. Manufacturing - what manufacturing?

Retail? Just heard on the radio that Ohio is having its first tax holiday. All back-to-school items sold on the specified date will not have state tax. Apperently, the Ohio government has noticed that retailers have been getting hammered are using this gimmick to try to improve things. It might make a blip in the short term, but the economy remains doomed.

[LawsofPhysics]

Growth forever in a finite world with finite physical resources...?

Good luck with that.  The longer we keep putting it off, the greater the cycle of creative destruction.

Thin the fucking herd already.

[gcjohns1971]

If I redefine inches and feet to less than they were, can I really claim that I've miraculously grown in middle age?

This is the silliness of 'growth' in an era of QE and central planning.

[Nobody For President]

But, but AMZN is up 13% + as I type - a + $65 gain today.

BTFATH

[VW Nerd]

Lets see....Netflix at 245PE, Amazon at 700+ PE, 370 labor hours for a person earning $100K to buy a share of the DOW vs. 300 labor hours for a minimum wage worker to buy a DOW share back in the early 1980's.  I'm thinking YEAH it's not cheap!  I suspect inside money is desperately seeking bagholders.  We'll see....