Singapore?s market barometer, the Straits Times Index (SGX: ^STI), closed at 3,408 points today. That?s just a hair?s breadth away from its 52-week high of 3,433 points (according to Yahoo Finance).
When stocks hit 52-week highs or set new all-time highs, it?s not uncommon for investors to be worried that a fall may be just around the corner. So, here?re some helpful pointers on what you can when the market seems to be at a ?high.?
1. Have the right focus ? that is, on value
This might sound odd, but there might be scenarios where I think stocks are expensive in…
Singapore’s market barometer, the Straits Times Index (SGX: ^STI), closed at 3,408 points today. That’s just a hair’s breadth away from its 52-week high of 3,433 points (according to Yahoo Finance).
When stocks hit 52-week highs or set new all-time highs, it’s not uncommon for investors to be worried that a fall may be just around the corner. So, here’re some helpful pointers on what you can when the market seems to be at a ‘high.’
1. Have the right focus – that is, on value
This might sound odd, but there might be scenarios where I think stocks are expensive in Singapore when the Straits Times Index is at 1,000 points, and yet very cheap when it’s at 4,000. How can that be?
It can, if the Straits Times Index was valued at 40 times earnings at 1,000 points and only 5 times earnings at 4,000.
When it comes to individual shares or market indexes, what matters isn’t the absolute price level – it’s the level of the share or index in relation to its underlying profit and future profit growth. The historical experience of the S&P 500 (a broad market index in the U.S.) can serve as an instructive example:
Source: Multpl and S&P Capital IQ
Although the S&P 500 is almost 40% higher today compared with where it was at the start of 2000, it’s nearly one-third cheaper if we look at its price-to-earnings (PE) ratio.
Coming back to the Straits Times Index, it’s currently valued at around 13.8 times its trailing earnings if we use data from the SPDR STI ETF (SGX: ES3) as a proxy (the SPDR STI ETF is an exchange-traded fund which mimics the fundamentals of the Straits Times Index).
This valuation is actually a slight discount to the index’s long-term average PE ratio; according to Reuters, the Straits Times Index’s average PE from 1993 to 2012 had been 16.6.
We can then use such information to find out if there’s any value to be found in the market. The bottom-line is that as investors, we should be thinking about the underlying fundamentals of a share or a market index for an indication of how ‘high’ or ‘low’ they really are.
2. Look at individual shares for bargains
The Straits Times Index has a storied reputation as a barometer of Singapore’s stock market. But, there can still be huge disconnects between its valuation and that of an individual company. The same goes too even for the 30 companies which are part of the Straits Times Index.
For instance, land transport outfit ComfortDelGro Corporation Limited (SGX: C52), a component of the Straits Times Index, is carrying a historically-high valuation at the moment.
Source: S&P Capital IQ
At ComfortDelGro’s current price of S$3.02, it’s valued at 23 times its trailing earnings – that’s a PE ratio that’s higher than it’s ever been over the past 10 years (from the start of 2005 till today). You can observe this dynamic in the chart above.
Meanwhile, another of the Straits Times Index’s components, Keppel Corporation Limited (SGX: BN4), is available at low valuations both in comparison with the share’s own history and with the index itself. This can be seen in the table below, which shows key valuation figures for Keppel Corp (the table comes courtesy of my colleague Stanley Lim):
Source: S&P Capital IQ
All told, ComfortDelGro and Keppel Corp serve as instructive examples on how individual companies can still be expensive or cheap regardless of where the Straits Times Index is at.
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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 writer Chong Ser Jing doesn't own shares in any companies mentioned.