Valuation of stock indices

Stock indexCurrent
pot'l, %
Dow Jones Industrials30,99712,204-61
Dow Jones Transportations12,8575,176-60
Dow Jones Utilities858354-59
S&P 500 Index3,8411,533-60
S&P 400 Index2,4631,082-56
S&P 600 Index1,232606-51
S&P 500 Financials504466-8
S&P 500 Health Care1,371492-64
S&P 500 Energy318221-31
S&P 500 Information Technology2,339807-65
S&P 500 Communication Services22667-70
S&P 500 Consumer Discretionary1,368419-69
S&P 500 Consumer Staples670181-73
S&P 500 Industrials748303-59
S&P 500 Materials468110-76
S&P 500 Real Estate22953-77
S&P 500 Utilities320129-60

* "Buy-Sell" is the difference in the average actual performance in 2020 of stocks that were rated as buy and those rated as sell at the beginning of the year.

We calculate intrinsic value of a stock index by combining intrinsic values of its constituent stocks using the index calculation algorithms. The resulting index valuation, therefore, reflects past reported financial performance of its companies. Inevitably, there is a lag between the current situation and what is reported in financial statements.

What is much more important, though, is the companies future performance, which we forecast solely on the basis of their past financial performance. Read more on this in the section “A word of advice and caution” on this page.

In our opinion, relative valuation (i.e. in relation to each other) of individual indices presented here might be more useful than their absolute valuation. Be mindful of the reporting lag mentioned above, too!

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What is behind this booming market? Why is it at record highs despite a severe recession? The answer, apparently, is very simple - it is the abundance of liquidity. The Fed, supported by both political parties, is flooding the economy with money. But how long will this bonanza last?   [read all]

What Warren Buffett did not say

2020-05-07   Author: Value Investor

Berkshire Hathaway’s annual shareholder meeting is always a remarkable event, especially for value investors. It was not an exception in this regard this year, too, though it was quite remarkable in other respects, one of them being what Warren Buffett did not say.   [read all]

Who is behind these market moves?

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Who is really benefiting from stock buybacks?

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There is a lot of hype about US companies spending obscene amounts of money on purchases of their own shares. But is it really that good for shareholders as we are led to believe?   [read all]

How the crisis will affect asset allocation?

2020-04-21   Author: Value Investor

One of the consequences of the crises will be an increase in risk aversion among ordinary investors. This would lead to a massive reallocation of capital from stocks first into savings accounts and then into another safe forms of investments.   [read all]

Another day, another dollar (for some)

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A reflection on the past trading day, oil, Amazon, misery stocks, globalization, seigniorage, and what sign to monitor longer-term for worse things to come (hint: US dollar).   [read all]

What is this light at the end of the tunnel?

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Is this the end of the tunnel or the headlight of in incoming train. At this point nobody knows for sure. So, what signs to watch and what approach to use in making investment decisions?   [read all]

A word of advice and caution

Investing in the stock market is inherently risky. An investor can lose all of their investment if the value of the stock (or portfolio of stocks) goes to zero. On the other hand, an upside could be very large (theoretically - unlimited). Taking the risk could prove to be disastrous or spectacularly successful, or anything in between.

So, how can you improve your chances of success? There are a number of recommendations to that effect:

  • Make your investments based on a solid and extensive research of the company in whose stock you plan to invest. Forecasting the company’s future performance is probably the most important aspect of such research. Invest only when you are confident in your valuation of the the company’s intrinsic value. This would make your life a lot less worrisome, irrespective of the market conditions.
  • Continue monitor the company’s performance after you have invested in its stock. Adjust your forecast of the company’s future performance after each quarterly earnings report and on any major news.
  • Diversify your portfolio. A highly concentrated portfolio could be spectacularly successful if you are lucky, but could also underperform by a large margin if even one of the stocks in it tanks.
  • Monitor geopolitical and national situations and estimate their impact on the equity market. There is a very high correlation between the general stock market and individual stock performances. Your prudent stock picking would help you to outperform the market but would not save you from losses if the overall market declines sharply. Formulate your investment strategy in writing and stick to it. Backtest your investment strategy over a long period of time (10-20 years).
  • Make sure that you will not need the money you invested in stocks in the near future (at least 5-10 years) and can do without it if all (or at least 50% of it) is lost. Otherwise you might be forces to sell your holdings at a market low.

Investor’s Craft offers you tools for selecting stocks. These tools use sophisticated valuation algorithms that interpret historical financial statements of publicly traded companies. It is a purely “mechanical” process with no human intervention in it.

There is a big disadvantage to it: even the best computer is not as smart as an average financial analyst. On the other hand, there is a huge advantage to this process: it is objective. All stocks are evaluated by the same algorithm on exactly the same bases. This makes possible direct comparisons among many different companies.

Please keep in mind, though, that stock valuation results generated by valuation algorithms presented on this site are just rough estimates based on the company past financial statements. What is of the paramount importance is the company future performance. Nobody knows what it will be. We could only make educational guesses about it.

So, take with a great deal of healthy skepticism recommendations assigned to individual stocks on this site (“sell”, “hold”, “buy”). They are the result of purely “mechanical “ algorithmic valuation intended for a rough classification of the valuation results. They are not actual recommendations to buy or sell specific stocks. In fact, we do not offer stock-specific or market recommendations. We just offer tools for stock analysis. In our opinion, these tools are best used for preliminary stock screening, as they offer a very fast way to narrow down the number of stocks that might be of interest to an investor from several thousand to several dozen.