Warren Buffett’s market indicator exceeds 130%

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Warren Buffett (Trades, Portfolio) preferred market indicator was 132.4%, up 18.8% by April 1 level from 113.6% but 18.9% below the high of 151.3 % recorded in December 2019. “data-reactid =” 12 “> Friday, the day before Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B) annual meeting of shareholders, the preferred market indicator for Warren Buffett (trades, portfolio) stood at 132.4%, up 18.8% from April 1 level of 113.6% but 18.9% below the December 2019 high of 151.3%.

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Dow Jones Industrial Average traded at an intraday low of 23,731.33, down 614.39 points from Thursday’s close of 24,345.72 on the heels of Amazon.com Inc. (NASDAQ: AMZN ), a Berkshire stake, announcing in a first quarter earnings release that the Seattle-based e-commerce giant plans to spend all of its expected operating profit of $ 4 billion in the second quarter on related expenses Coronaviruses “to deliver products to customers and keep employees safe,” says CEO Jeff Bezos. “Data-reactid =” 40 “> The Dow Jones Industrial Average was trading at a daily low of 23,731.33, down 614.39 points from the close of 24,345.72 Thursday in the stride from Amazon.com Inc. (NASDAQ: AMZN), a Berkshire stake, announcing in a first quarter earnings release that Seattle, according to CEO Jeff Bezos, the world-based e-commerce giant plans to devote 100% of expected second quarter operating profit of $ 2 billion spent on coronavirus “to deliver products to customers and keep employees safe”

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Likewise, Apple Inc. (NASDAQ: AAPL), Berkshire’s main holding company based on the 13-F file from December 2019, said on Wednesday that due to uncertainty about the virus, the technology giant based in Cupertino, California jumped its June- quarter profit forecast despite the release of adjusted results that exceeded consensus estimates.

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The Dow Jones rose more than 11% in April in hopes of potential treatment for the Covid-19 virus and the reopening of the economy as the number of new cases begins to decline.

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As markets rise from the historic lows of late March, the ratio of total market capitalization to gross domestic product has climbed above 130%, while remaining about 20% below the historic high.

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Based on the current level of market valuation, the expected market return over the next eight years is around -0.4% per year assuming a return to the average level of 80%. According to the graph of expected and actual returns, the expected return varies from -8.2% per year in the most pessimistic case to 4.50% in the most optimistic case.

The following video explores how GuruFocus Premium users can view historical ratings using the interactive graph. Two key integrated chart models are the Peter Lynch chart and the price and sales stripe chart.

Legendary investor Peter Lynch, who managed the Fidelity Magellan Fund in the 1980s, developed a quick way to determine if a stock is undervalued or overvalued: Compare the price line to a profit line based on a ratio price-of-profit of 15. Figure 1 shows an example of a Peter Lynch chart for Coca-Cola Co. (NYSE: KO), Berkshire’s third largest stake in the December 2019 filing.

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As Figure 1 illustrates, Coca-Cola’s price line is higher than Peter Lynch’s profit line, suggesting a possible overvaluation.

Lynch warned that cyclical companies like Amazon and Apple could have high profit margins at the peak of economic cycles, resulting in artificially low price-to-profit ratios. Coca-Cola, on the other hand, is in the consumer advocacy industry and, therefore, the profit margins of the Atlanta-based beverage company are not as sensitive to changes in the business cycle.

Unlike the price-to-benefit ratio, the price-to-sale ratio is less affected by cyclicality and, therefore, more accurately compares current valuations with historical valuations. Buffett’s market indicator of total market capitalization to gross domestic product is like a price-to-sales ratio, with total market capitalization representing the US market price and gross domestic product representing total US market sales. Figure 2 shows an example of a price-sale valuation stripe graph for Apple.

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As Figure 2 illustrates, Apple’s price line is close to the midpoint of the two valuation ranges, suggesting a fair valuation.

Disclosure: The author is long Apple at the time of writing. The discussion of Berkshire’s portfolio portfolios in this article is based on the conglomerate’s December 13, 2019, and does not take into account transactions made in the first quarter of 2020. Pursuant to Securities and Exchange Commission regulations, the deadline for declaring quarterly portfolios is 45 days after the quarter ends.

Learn more here:

  • Video: Monitoring of Warren Buffett’s transactions with GURUG
  • Video: 4 large-cap stocks with strong Buffett-Munger characteristics
  • Warren Buffett’s market indicator falls near the 3-year low

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“Data-reactid =” 204 “> This article was first published on GuruFocus.

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