I?ve a habit of looking at how cheap or expensive stocks are in Singapore at the start of every month and I do so for a simple and good reason: Our odds of success will be higher if we invest when stocks are cheap as oppoosed to when they?re expensive.
As 1 June 2015 will be a public holiday, I thought I?d bring the schedule forward by just a little and start evaluating the state of the market today instead.
How value?s found
There?s a simple way for us to gauge how cheap or expensive shares are at the moment and it…
I’ve a habit of looking at how cheap or expensive stocks are in Singapore at the start of every month and I do so for a simple and good reason: Our odds of success will be higher if we invest when stocks are cheap as oppoosed to when they’re expensive.
As 1 June 2015 will be a public holiday, I thought I’d bring the schedule forward by just a little and start evaluating the state of the market today instead.
How value’s found
There’s a simple way for us to gauge how cheap or expensive shares are at the moment and it involves a comparison of the market’s current price-to-earnings (PE) ratio with its average long-term historical PE ratio.
When we talk about the “market” in Singapore, it’s often the case that we’re referring to the Straits Times Index (SGX: ^STI), the most widely-followed benchmark for how stocks here do.
Here’s how the Straits Times Index’s valuation looks like at the moment:
- The SPDR STI ETF (SGX: ES3) is an exchange-traded fund which closely tracks the fundamentals of the index and it has a PE ratio of 13.8 currently.
- Meanwhile, the Straits Times Index has an average PE of 16.9 over the 37-year period stretching from 1973 to 2010.
When the two PE ratios – 13.8 and 16.9 – are compared, it’s not unreasonable to say that the market’s far from being both dirt-cheap and crazy-expensive. For some perspective, you’d have to go back to the start of 2009, when the Straits Times Index had a PE ratio of 6, to find dirt-cheap shares.
Finding value in another way
There’s another valuation measure which can be very useful in telling us how cheap or expensive shares are and that is the number of net-net shares which exist in the market at the moment.
A net-net share is a company with a market capitalisation that’s lower than its net current asset value (total current assets minus total liabilities).
Net-net shares are generally considered to be really cheap bargains because investors are getting a discount on the shares’ current assets (things like cash and inventory) net of all obligations. To make things even better, the shares’ fixed assets (like properties, factories, equipment etc.) are then thrown into the mix for free.
It thus follows that the market, as a whole, will be very cheap if net-net shares start appearing in large quantities.
With that, here’s where we stand at the moment:
Source: S&P Capital IQ
The chart above (click for a larger image) shows how the number of net-net shares in Singapore has changed since the start of 2005. And as you can see, there are 99 net-net shares in Singapore’s stock market as of 28 May 2015.
If we compare the current state of the market with the nearly 200 net-net shares we saw in the first-half of 2009 and the less than 50 net-nets that we had in the latter-half of 2007, it’d be fair to say that the market’s somewhere in the middle between being cheap and expensive at the moment.
This isn’t too far from the conclusion that we got when we had studied the Straits Times Index’s PE ratio.
A Fool’s take
We’ve seen two different ways to value the market and both methods more or less point to the same takeaway: Singapore’s stock market is nowhere near the extremes on the cheap-expensive scale.
This isn’t bad news for investors given that we’re still far from being in a crazy-expensive situation.
But in any case, here’s an important caution about all the data you’ve seen here. They’re useful to note if you’re using them to make long-term investing decisions; they’re of no use whatsoever if you’re thinking of using the information for short-term investing. How cheap or expensive shares are today can’t tell you anything about how they’re going to perform over the next month or even the next year.
If you're interested in more investing analyses and the latest news about Singapore's stock market, you can get both from The Motley Fool's free investing newsletter, Take Stock Singapore. Written by David Kuo, Take Stock Singapore can help you grow your wealth in the years ahead. So, come sign up here.
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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.