Are Stocks Cheap Now?

Price = Fundamentals + Exuberance

Mr Market decides the "Exuberance"

You have a company that you like

• Price is 21 x Earnings. 
• It has a stable present but also forward earnings of 15. 

Then it is not cheap to buy. 

• Price = 15 x Earnings + 6 x Exuberance Earnings  

Overvalue if ...

• Price = 20 x Earnings + 1 x Earnings  

Undervalue if .... 

• Price = 25 x Earnings + (-4) x Earnings
• Price = 30x Earnings + (-9) x Earnings

What does that mean ?

We need to understand how to figure out a "fair valuation" using forward earnings.

• First, get the historial PE ratio and it may give you a data point. (PE lower is better in general)
• Then, we need to figure out the growth or forward earning guidance to deccide what is a fair value of any stock. 
• The issue or the key is along the future forward earning guidance.

In summary:

• If PE drops and forward earning guidance is also trending up, it could be a good indicator to be bullish.
• Be patient, it may not happen often but it will come a few times every two years.
• Be clam, when it happens; i.e. take out any implusive action and wisely made a Contrarian move.
• An easy sceanrio:
• When a good company is trending up on their present and forward earnings, but there is an abundance of pessimism among other investors has pushed the price of the stock below what it should be, and the contrarian investor will buy that before the broader sentiment returns and the share prices rebound.