On 19th September 2013, after Fed’s surprise “no-taper” move, Warren Buffett said during an interview in CNBC that stocks are no longer that cheap anymore. He specifically said, “[Stocks] have moved a long way. They were very cheap five years ago, and ridiculously cheap. That’s been corrected. They’re probably more or less fairly priced now… We’re having a hard time finding things to buy.”
The Standard & Poor’s 500 (S&P 500) Index is currently at a PE ratio of 16.4 while the average PE ratio is at 15.5. Therefore, the US market is currently fairly priced. Over in Singapore, the Straits Times Index (SGX: ^STI) is valued at a PE ratio of 13.3 currently.
The Course of Action
With stocks more or less fairly price according to Buffett, what are investors to do? Won’t there be individual stocks that are still undervalued, even though the index may be fairly priced?
There are certainly stocks that carry valuations higher than the STI. STI constituent stocks such as Genting Singapore PLC (SGX: G13), StarHub Limited (SGX: CC3) and Global Logistics Properties Limited (SGX: MC0) are trading at a PE of 30.2, 20.6, 17.0 respectively. Investors interested in companies that may be deemed as overvalued would be better off researching into such companies to determine if they are a good buy once prices come down. When prices do come down, and if the fundamentals are still intact, we can safely invest in the companies we have already researched into.
In any market situation, there will be stocks that are undervalued and some that are overvalued. It is our job to invest in companies that still provide the bang for our buck. There may still be stocks that are undervalued in the current market. Warren Buffett is having a hard time finding those companies but that does not mean undervalued stocks do not exist at all. We just have to look harder, that’s all.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.