Do analysts make predictions that seem to defy logic, merely to get the attention of the press? Can they keep a straight face as they expound on the future?
I am amazed at forecasts informing me that the duck at the pond's edge is actually a dog. I put the analyst's thought process down to, "how do I break through all the noise?". If the S&P 500 is currently trading at 4,140, no one is going to react to a middling prediction of 4,000 by year-end. Enter this week, Jim Chanos.
S&P500
As reported by CNBC, he believes the S&P will earn $200 in 2023. Applying his Bear market multiple of 9x to 14X earnings ( P/E multiple) he anticipates the S&P 500 trading down to 1,800 to 2,800 this year. His $200 earnings forecast is a common estimate, but his multiple of earnings is not.
What multiple of earnings might we expect the S&P 500 to trade at, based on the past 70 years?
Source: data.nasdaq.com Vertical axis indicates the price/ earnings multiple - 2009 and 2010 were outlier years
From the 1950s through the 1980s this index traded at 10X to 18X earnings. But in the 1990s multiples increased and have stayed elevated.
Jim Chanos is a highly regarded short seller. His profits are likely to increase in down markets. It makes sense that he is "talking his book" - as lowering the price of securities is to his benefit. In my view, a more logical forecast would simply use the historic range of multiples from the current era (16x to 25x times earnings). My duck analysis would provide an expected S&P 500 pricing range of 3,200 to 5,000. With such a wide range of outcomes, one could conclude that basing one's investment portfolio on the expected P/E multiple serves no practical purpose. Better to design a well-balanced portfolio and ignore P/E based forecasts.
Bitcoin
Predictions on the outlook of Crypto prices create excitement. From a high of $59,000 in 2021, Bitcoin dropped to $16,500 in October 2022. Currently closing in on $24,000....talk about a wild ride. Duck logic should inform us that the future price level for Bitcoin is not knowable, but that volatility is very likely to continue.
So what do I make of Tim Draper's prediction of $250,000 by the end of this year or Standard Chartered's call for Bitcoin to fall to $5,000? We can refer to the past five years of Bitcoin pricing to see if either forecast quacks.
This chart notes Bitcoin's price since 2019. One hopes that the majority of investors got in early before the two price peaks. Perhaps a more modest Bull or Bear case for this cryptocurrency is warranted.
Source: Stockcharts.com
Tesla
Is Tesla a car company or broad-based technology enterprise? The answer has significant repercussions for math-based Tesla stock price predictions. The Fords and GMs of the world trade at 5x to 9x earnings. Their boom-to-bust cycle over the years cautions investors that good times are followed by tremendous letdowns.
What to make then of Tesla - is it a duck that should trade at a lower multiple or a new species that should be rewarded with its current 45x earnings multiple? I lean towards a duck. Tesla is primarily a car manufacturer that is beginning to experience significant competition. The stock appears to trade on emotion, so common sense may not matter to the share price in the short to medium term. From a high of $414 per share in early 2022 the share price collapsed to $104 in early 2023. today it trades at $195.
Source: Stockcharts.com
Ark Invest is currently forecasting a 2026 price target of $4,600 for Tesla shares (a 2,200% return in 3 years!). Given the extremely competitive nature of the car business, this target price is enough to distort one's vision. Am I looking at at a once in a lifetime opportunity or is this price objective a mirage? I am more comfortable calling Tesla a superior car company. If the competitors trade at a 10x multiple perhaps Tesla warrants a 30X- 40X multiple. Based on flat earnings of $4.00 per share this year, a duck-based estimate of $120 to $160 per share would be a more cautious valuation.
Logical pricing will prevail, but not in the immediate future, as outrageous forecasts gather eyeballs.
best regards, Tim
Thoughts, agreement/disagreement? email me at tim@mortonir.com
Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's. My comments are not to be taken as investment recommendations. They are purely for discussion purposes. Please see your registered advisor for investment advice.
留言