Didn't think we'd ever get that low again. But bounced hard off it.
Morningstar pegs IV at $144,000 B.
Clearly very undervalued at interest rates under 10 year 4%.
As Buffert said in 1999 "to justify these valuations, we need S and P Earnings to Double OR the TEN YEAR TREASURY YIELD to be CUT in HALF. (10 year yield was then 6.2%).
What has happened? BOTH. S and P was 28 times Earnings, neatly TWICE today's valuation.
Your comments, that current valuations should take into consideration the current low interest rate environment, have been bothering me. Now, after studying Aswath Damodaran's spreadsheet for TSLA, I believe I understand how to propagate a variable discount rate through time.
You're RIGHT. If one believes that the dividend will grow by a real (inflation adjusted) 1.5% per year forever and then discounts the first ten years by a real 1.5% per year, the second ten years by a variable, but increasing rate until the rate hits 4.5%, and then uses a real discount rate of 4.5% for the remainder of a thousand years, then the current Price to Dividend ratio of about 50X does make sense. Congratulations!
But you're WRONG, assuming that you're not planning on holding your portfolio forever. Twenty years from now, when you go to sell your portfolio, your buyer won't care what interest rates YOU USED to determine YOUR price (a P/D of ~50X, which was equivalent to a dividend yield of 2%). He'll only care about HIS view of HIS future. Assuming that Bennie's ZIRP is nothing more than a faint memory, and that he uses a real growth rate of 1.5% and a real discount rate of 4.5%, he may only offer you 33 times the then prevailing current trailing dividend per share (equivalent to a dividend yield of ~3%), not the 50X that you were hoping to get. The annualized (over twenty years) capital loss will decrease the already low ATR you originally agreed to accept at the time of purchase, by ~2% per year.
Think about where the hockey puck (discount rate) will be in the future, not where it is today.
The price you pay for an Equity is ALWAYS heavily influenced by the alternative: what you get guaranteed safe.
It's Securities Analysis 101. The big debate now is: are low long term rates going to be around for long term. Everyone knows short rates will go higher at some point. But if you believe long rates are going to stay within 250 Bps from here..for a very long time...stocks are quite cheap.
If you think long term rates should be 200 or so Bps higher....stocks are at their historic norm and bonds would then be in ballpark of norm.
I you think long bond is going back to 1999 levels, we're a little overpriced.
My own iv calculation is $119 per b share(assuming about 15x earnings, some adjustments for excess cash and options as well as a discount to look through earnings due to future taxes on dividends
"In the ordinary common stock, bought for investment under normal conditions, the margin of safety lies in an expected earning power considerably above the going rate of bonds."
Graham, "The Intelligent Investor"