The banks are grossly over valued. CitiGroup should be an $18 stock, not a $27 stock.
On the other hand the stock market as a whole is under-valued, especially the consumer group. Investors need to step up to the plate and buy stocks now to stop the wreckage. Yes there are still problems, but those potential problems are more than made up for from the low market valuation.
How do you justify saying the market is under-valued? Well, just think of it as a bond that has a maturity of 100 years that pays 2% now, but that payout grows by 8% per year. In 100 years, $2 growing at 8% = $4,400 payed per year. The S&P 500 closed at 798. It pays a dividend of $16 per share. Assuming 8% dividend growth, the annual dividend income from owning one share of the S&P 500 Index at $798 would be $35,196 per year in 100 years. People forget about the value of increasing dividends over time.
What is the S&P 500 worth to the long term investor given the assumption of 8% dividend growth and 3% inflation? The equation would be $16+$16*(1+(.08-.03))+$16*(1+0.05)**2+$16*(1+0.05)**3, ... +16*(1+0.05)**99. The value of the dividends alone would be worth 41,760 by the end of 100 years. Given a 3% inflation, that means the dividends alone are worth 2,173 using the present value of 41,760 at 3% for 100 years. If one uses 4% inflation, the future value of the dividend stream would be 19,802 and the present value of the dividend stream worth 1,030. Clearly the market at 798 is very under-valued!! |
