P/E Ratio for Portfolio

Using the Marketocracy.com data I don't have easy statistics to pull such as average P/E ratio and the like, so everything has to be done manually. But with the market selling off so strongly I was curious how expensive the items I own are. There are many (many many many) ways to measure value but the simplest is simple Price Earnings ratio - simply a function of stock price divided by earnings stream. But even that is not simple - one can look at trailing earnings, forward earnings, some mixture of the two, etc. And once you have your number what does it mean? What does 18 mean? What does 24 mean? The number alone is relatively useless. But in a big picture sense you want to compare the values of your stocks versus the market overall, and stocks in the same sector in specific. I also like to compare earnings versus growth (sometimes called PEG ratio - or PE to growth ratio). The higher the growth rate, the higher a PE ratio one would allow. But even that has many caveats.

What I've done below is list all the stocks in the fund by broad sector with their forward P/E ratio. I like to go out about 9-12 months since I think the future is a lot more important than the past. For example, if you look at the past you would of missed the entire fertilizer stock run as the stocks always looked 'expensive'. With that said, using forward P/E ratios (vs growth) has it's issues as well

1. It's an educated guess
2. It's an educated guess by people who are very conservative and often wrong (analysts)
3. What is a fair P/E ratio for each sector? the market overall?
4. What are forward growth rates for each company? each sector?
   
5. What should the average stock in each sector be valued at?
6. What should value 1 stock in a sector, higher or lower than another?
   

Etc etc - I listed 6 things, I could list 60. The point is, this is not a science - otherwise statisticians would dominate the stock market. It's part art, part science, part psychology experiment. Which is why I really like the market ... and why most "logical" people quickly find the stock market to be a very frustrating experience. In the "long run" it is said the stock market is a weighing mechanism (reflecting true value) but in the short run its a voting mechanism (reflecting a popularity contest along with sentiment). Trying to gauge all these moving parts, and balancing your voting against the herd is half the battle.

So in summary there is no correct one answer. There is no way to accurately reflect "cheap" versus "expensive" - what appears cheap one month can appear very expensive the next (and vice versa). We have seen this as restaurant stocks or retail stocks slash forward guidance - suddenly they go from "darn cheap" to "darn expensive" in the span of 10 sentences in a presss release. The same goes for book value. The same goes for just about any measuring tool out there.

With that said, here is the list of fund holdings by forward P/E - I have highlighted in green all positions that I have what I consider a heavy stake in (>1.5% of the portfolio) - positions that can affect the fund in a greater manner than my minor positions. I've tried to use forward earnings estimates as close as possible to Dec 31, 2008 to be consistent from 1 company to another

Agriculture - Fertilizer
CF 10.6
MOS 13.4
POT 21.0

Agriculture - Equipment
AG 18.1
CNH 15.3

Infrastructure
CBI 19.7
FWLT 18.7
JEC 24.4
KBR 19.9
KHD 11.7
MDR 15.6
SGR 22.0

Financial/Consulting
BLK 21.4
DHIL n/a
FCN 24.4
HURN 20.9
MA 25.3

Solar
FSLR 88.0
LDK 20.8
STP 27.9
SOLF 16.3
TSL 13.6

Coal
BTU 17.0
CNX 19.8
MEE 16.0

Oil Service
CLB 18.5
NOV 13.0
SII 14.7

Oil Exploration
PBR 12.4

Oil Driller
ATW 8.0
DO 10.3

Healthcare
ILMN 54.8
MHS 23.7

India
HDB 25.2
IBN 22.0
SLT 14.8

Other Foreign
CTRP 43.6
EDU 40.8
GFA 7.2
HOGS 10.7
MICC 16.8
MTL 10.0
WX 35.7

Silver
SLW 32.0

Technology - Networking
BCSI 18.1
RVBD 26.3

Technology - Communication
AAPL 25.1
RIMM 26.5

Technology - Search/Advertising/E-commerce
BIDU - 66.3
GOOG - 28.9
MELI - 87.0

*******
Overall, I like the "value" of the stocks in the fund. Again, these appear "cheaper" than they really are because I use forward earnings instead of trailing earnings for my assessment. But I believe many of the companies in the portfolio have estimates that are understated by analysts for 2008, hence the forward PE ratio today, looks higher (in many cases) than what it will be proven to be when we actually get to Dec 31, 2008.

Three other points
(1) I do like to focus on scarcity value - i.e. when there is a theme but very few stocks to play it, I think that warrants a higher valuation and I am willing to overlook something I'd otherwise avoid - for example in China there is 1 major dominant search engine - Baidu.com (BIDU). I've never had a big stake due to its lofty valuation, but I can at least conceptualize why the extreme valuation exists (keep in mind this stock is down $150 in the past month so it was FAR more expensive mid December). Of course I'd like to see it 30% lower, at which point I'd love to load up but this has been, and will continue to be, an expensive stock for a long time due to scarcity value, in my book. The same would go for Mercadolibre (MELI).

(2) Within each group, all other things being equal I do prefer to buy the cheaper stocks - sometimes this works, sometimes it doesn't. For example, buying the 'cheaper' stocks in the solar sector has worked against me, as this is clearly a momentum based sector where people seem to gravitate simply to what is moving up the fastest without looking at valuations. Hence, First Solar (FSLR) has had an enormous move and has just continued to move up month after month. Does it deserve a premium? Certainly - it has the growth of the solar sector without the limitations of the polysilicon shortage (hence has great gross margins). But how much of a premium does it deserve? And when does it narrow? Those are the questions that are the "art". Hence I've missed much of this company's move as I found it expensive all along the way - but it just continued to go up. But you can see in a general sense, I am trying to overweight the 'cheaper' stocks within each sector in a general sense.

(3) Companies in sectors that are considered "secular" rather than "cyclical" generally have far greater P/E multiples. But sometimes the greater chances for stock price appreciation are finding sectors whose cyclical growth is changing over to secular (or at least a VERY long cycle of growth). So ironically two of the sectors I find as most "insured" from a slow down, fertilizer and deep sea oil drilling have some of the lowest valuations. The reason is these are traditionally cyclical businesses. But a thesis I would propose is that deep sea oil drilling and fertilizers are going into long term secular cycles. For the former oil at $50, $70, or $90 is not an issue - these large deep sea rigs in international waters are in huge demand and this is where the future of oil exploration is. For the latter, well I've outlined the secular changes in the world growth patterns and why fertilizer should benefit countless times. Thus far the market disagrees with me and gives both sectors what I consider poor multiples for their potential growth. For example Mosaic (MOS) is growing faster than 98% of the stocks in the market (folks its earnings have grown 100% this past year), but trades at "market average" multiple (50th percentile). Why? People think its growth will be over very soon. But if this attitude changes (as more evidence surfaces to the contrary of this "growth will be over in a few quarters" scenario), not only will we see earnings expansion but the ever elusive "multiple expansion" - which means the stock price would go up due to both factors. And we'd have some massive gains.