I’ve written and talked a lot about the overall stock market being slightly overvalued and bonds being in a massive bubble. With that said, many stocks and industries have sold off dramatically over the last year and a half and are in their own bear markets.
It is somewhat surprising that the index itself has not fallen off a cliff when you look at how many stocks are 20-30% below their 52-week highs.
A big reason for this is that there are other pretty obvious bubbles developing in specific industries, where stock valuations greatly exceed intrinsic value. In the search for yield, companies with little to no growth have had their valuations bid up to 25-40% higher than historical averages and the S&P 500 index itself. This is despite the market not being very cheap in the first place, making the potential for stock declines that much more severe for these stocks.
Packaged foods completely overvalued
Shares in the S&P 500 packaged-food industry index are up 20% over the last year, compared to a 1% rise in the full S&P 500. The S&P 500 Packaged Foods Index traded at a 42% premium to the S&P 500 as of June 30th, based on enterprise value to forward EBITDA. According to Bloomberg Intelligence, packaged-food companies trade at 18 times forward earnings, 14% higher than the multiples for companies in the MSCI World Index.
This is a clear divergence from the actual business performance of the industry.
In the quarter ended June 30th, sales at consumer-staples companies in the S&P 500 fell 0.23% from the year before. Earnings for this group fell 6.92% from the year before. Spending on R&D to develop new and exciting product fell by 7.73% from the year before.
Below is a great Bloomberg article written on the overvaluation in Packaged-Food companies and Consumer Staples in general. These stocks have a large impact on the S&P and have been counterbalancing the declines in other sectors. It seems very unlikely that these stocks will maintain their valuations and this would likely cause permanent losses of capital.
This is in stark contrast to other sectors such as Financials that have never been cheaper from a valuation standpoint, nor stronger from a capital/balance sheet perspective.
When this disconnect between fundamentals and price converges, I’d expect to see meaningful growth in TTCM portfolios, whereas I am much less positive on the stock market itself.