Anyone Notice The Gaping Difference In Valuation Between US & SG Companies?

[juno.tay]

Hi Guys,

I been inactive pretty long but the recent change of events has pulled me back in. Certainly, many of the SG stocks have dropped significantly. However, what I noticed is that quality US Companies are tremendously undervalued relative to Singapore Stocks.

By US High Quality, i mean companies like Johnson & Johnson, Coke, Microsoft etc. Franchise companies with little debt and strong cash flows.

By my metric, more than half the companies aka more than 15 in the DJIA index trade under 15x Owners Earning (similar to Free Cash Flow), an almost unheard of event. To give you an example, the last time this happened was in 2009. By almost all methods of vauation, high quality companies now trade at their 10 year lows, with PE ratios of 8 - 12.

The US certainly looks far more attractive now with the weak US dollar, coupled with the strong Sing $.

[arthur]

Weak USD --> Strong overseas corporate earnings --> Low P/E

But is weak USD really good for all? Does weak USD signify strength in the companies or weakness in the American greenback?
Does weakness in greenback allows for better reported overseas corporate earnings or weaker financial system due to huge stimulus?

Strong cash flow may shows they have huge liquidity for future acqusitions OR... for impending crisis to fall back on.
Anyway, MSFT, GOOG, AAPL and the tech titans always have huge warchest of cash on standby for acqusitions. Not really much diff.

So does JNJ and the healthcare juggernauts. They kinda need it for their patent knifefight in lawsuits and M&A dinner every other day.


Cheers.

[juno.tay]

I am not a Macro guy so I am not too sure about the effect of the weak USD.

What I see is that is most startling is that their Cash Levels are at a historical high, putting them at a great financial position to be in. Sames goes to JNJ. I guess whats most startling is that these guys are trading at their all time relative valuation lows (i.e. P/E, P/B etc) when they are in better shape than ever before!

[Jared Seah]

Hello Juno.tay

You are right. The valuations in the US tends to be higher than SG stocks pre-credit crisis 2008.

If you are a international investor (you don't limit yourself to local SG stocks), some US stocks are looking mighty attractive. That's the beauty of price inefficiencies! It's a great value play for HK and middle-east investors where their local currencies are pegged to USD.

But for other international investors of US equities, there is concern with the weakening USD - Berneke has said low rates till mid 2013 and potential QE3 won't help with USD strength! If you are a mainland Chinese investor, over the past 12 months, USD has weakened by 20% and for Singapore investors by 15%... For eg, that means JNJ has to overcome this exchange rate risk "hurdle" in capital gains before international investors see profit in their local currencies.

It's a bit like USD priced HPT listed in SGX - its great "value" now on USD valuations; but if I buy, I need to factor in USD/SGD exchange rate fluctuations in the future. That would mean investors need some forex competence too

[juno.tay]

Thanks for your informative reply

I wrote an article directly rating to this topic. Check it out here!

Investing When The World Ends - The Compelling Case For US Equities

[corydorus]

Unlike SGD, USD is on the weakening trend. Buying on lower low with no end in sight is unncessary lost in addition to exchange cost.
For US market, I will only consider on the up trend at macro level.

[yeokiwi]

Microsoft at below PE of 10 is indeed compelling. With a weakened US dollar, microsoft profit will be expected to rise since its international sales are likely to be booked in other currencies.

[juno.tay]

I did a post on the weaking USD:

Investing in US Equities - What About The Devaluation of The Dollar?

The gist is that the USD is at a historical low vs the SGD.
Can it go lower?

Sure.

But at some point or another, it will eventually revert back to the mean. After all, Quantitative Easing will eventually end and interest rates can only move one direction now.

[freedom]

US QE has been done for decades already since .com bubble.

[D123]

So what is the mean you are expecting? And how long are you expecting the rate to carry on fluctuating before it reverts to your expected mean? What is your worst case scenario?

I think it would be prudent to have some conservative quantitative estimate. For example, say you expect USDSGD to reach 1.XX or 0.XX within Y number of years. By this time, the share price of ABC company should also reach $Z, which would imply a possible A% return after adjusting for USD depreciation/appreciation.

By the way, you should study ( a) a longer history of USD versus the SGD, and ( b) the performance of the USD versus other currencies, like the Swiss Franc over long periods.

I've previously posted some charts at another thread:
http://www.valuebuddies.com/thread-741.html