In my early posts I wrote about Dow 30 industrial average index and how it seems to me as overvalued compared to fair value of those stocks that included in it. Here I will list all the stocks inside the Dow 30 index and their fair values and the prices they are trading with in market. Based on the fair values of these stocks, a conclusion about if the Dow 30 is overvalued or undervalued or stable and has fair value can be made.
Price of Stock
Fair value of Stock
AMERICAN EXPRESS CO
CISCO SYSTEMS INC
WALT DISNEY COMPANY
GOLDMAN SACHS GROUP INC
HOME DEPOT INC
INTERNATIONAL BUS MACH CORP
JOHNSON & JOHNSON
JPMD JPMORGAN CHASE & CO
MERCK & CO INC
PROCTER & GAMBLE CO
RAYTHEON TECHNOLOGIES CORPORATION
TRAVELERS COMPANIES INC
UNITEDHEALTH GROUP INC
WALGREENS BOOTS ALLIANCE INC
EXXON MOBIL CORPORATION
Stocks Prices Compared to their fair values as of March 20, 2021
The above table listed all the 30 companies that are listed in Dow 30 with their prices and their fair values. There is some notes that should be clarified to make the above table reliable.
The above table is not a recommendation for any stock in any trade, if you want to buy or short any stock do your due diligence and make sure that your investing or trading systems align with the information listed above.
The assumption used to estimated the fair values of all the stocks above is as if theses companies growths’ are similar to the USA GDP growth which is 2.2%.
Some of the above fair values is in minus (-) which does not make sense, but it can provide a clue about how these stocks are completely overvalued.
Number of overvalued companies are (14) which is have the companies in the Dow 30 index, that might be the reason why the DOW 30 still in uptrend or sideway, and traders should exercise caution if they want to short stocks in uptrend with high momentum.
Traders can use their systems to look for short term deals that presented for them by market movement, investors on the other hand need to stick to stock fair value instead of its price, because even if there will be bear move the market at the end will appreciate the stock fair value and move toward it.
Stock fair value is something completely different than its price which is listed in the market that affected by the law of supply and demand. The wise investors need to distinguished between these two things and never buy stock that its price higher than its fair value and, never sell stock that its price is lower than its fair value.
Even with Nike earning report that released Dec 18,2020, the Dow 30 index still overvalued compared to the Sam 30 index that I released in the previous post.
Dow 30 as Dec 21, 2020
Sam 30 as Dec 7, 2020
Same 30 as Dec 21, 2020
Sam 30 compared to Dow 30 AS of Dec 21, 2020
As you can see above Sam 30 as of Dec 21, 2020 has jumped up as a result of increase in Nike stock value with 75.36 points but it still shows that Dow 30 is overvalued since the difference between the two is 7,489.81 points for the Dow 30.
And as discussed in the previous blog when I explain Sam 30 and how it works with Dow 30, when Dow 30 is greater than Sam 30 then it means that Dow 30 is overvalued, and when Dow 30 is less than Sam 30 then Dow 30 is undervalued, and when they are equal then that means the market is has fair value.
The Dow 30 index is a general index that measure the sentiment of the US equity market as well as investor in long run since it consist of the main 30 companies that affect the market and the economy in general. This index shows if the market is going in uptrend, downtrend or sideways. Because of that I used this index as a base for my analysis and I used all companies inside this index in order to come up with my index which shows the real value of Dow 30 index. My index which I am going to call it Sam 30 index is based in Dow 30 index as benchmark to all investors and traders alike to see if the Dow 30 index is an overvalued or undervalued or has fair value.
I am not going to describe the process that I did to come up with Sam 30 index, instead of that I am going to discuses how does Sam 30 index can be used in conjunction with the Dow 30 index in order to allow investors and traders see if there is an opportunity to go long or short or even to step aside and do nothing.
Let us assume that the Dow 30 is 30,000 points and Sam 30 is 23,400 that means the Dow is greater than Sam 30 with more than 6600 points, which means the Dow 30 is overvalued and investors should not invest in the market , and traders on the other hand should apply their technical analysis to see an opportunity for shorting any overvalued stock in this market. The same is true if the Dow 30 was 23,400 points and Sam 30 was about 35,000 that means the market is undervalued and investors and traders should look for an opportunity to go long with any undervalued stocks.
Sam 30 is not day by day index, instead is an index where its value updated whenever new earning report released by the companies that built the Dow 30 index. Once the earning report released for any company of those 30 companies that listed in Dow 30, Sam 30 index will be updated to its new value in the next day.
As of December 7, 2020 the Sam 30 value is 22,495.92, that means, when we do our analysis that described above, the market is overvalued
Comparison between Dow 30 and Sam 30
As you can see above the Dow 30 is greater than Sam 30 with more than 7,700 points which means that the market is overvalued and I suggested that investors to step back and do nothing while traders can short any overvalued company based in their technical analysis.
Look at market in these days to have a general overview about what meant when Isaac Newton said that ” I could calculate the motions of the heavenly bodies, but not the madness of the people”. The S&P 500 which is considered the average of the stock market made new lower low that breaks all other previous lows and was able to retrace back to the top. It wiped all profit that made since the start of the bull move in November 7, 2016, and return back to 2967, which considered the last support before started move to what considers last bull impulse wave before the sharp dropped started in March 18, 2020 ,due to COVID-19 pandemic.
There are many contradictions between experts about the market. Some of which are considering this is a correction phase, while others consider it new bear market, and the media which is no expert in this filed consider this drop just as pump in the road.
There are several factors need to be outlined before decide where is the market going. Some of these factors are based in technical analysis while the other based in fundamental analysis. From technical analysis point of view:
The market makes new low and sharp drop in March 18, 2020 until it reached the bottom to 2195 points, which was below SM(200) and broke the last bottom which was in December 24, 2018 which was 2342 points.
This bottom was created in just 5 weeks of strong sell-off in the market.
After 13 weeks from that bottom, the market failed to reached to the point where all sell-off started, which means that there is high momentum in the down-side, rather than up-side.
The market made an Isolated Island which considered a reversal pattern below the last top which created in Feb 19, 2020 which was 3380 points. This isolated Island followed by two strong bearish candle one of which is an engulf with highest volume ever since the start of sell- off, which is a strong indication that the market will resume its down move as shown below:
From fundamental analysis point of view there are also many factors that suggested that the market is either going in sideways or down-trend but never in up-trend, and they are as follow:
The leading companies in the S&P 500 index which made the market moved up after its sell-off that started at March 18, 2020 which are ( Microsoft, Apple, Amazon, Facebook, Google, and Johnson & Johnson, UnitedHealth Group Incorporated, Home Depot Inc, NVIDIA Corporation, Adobe Inc) did failed to make new higher (EPS) than the previous quarters. These stocks lead S&P 500 index and went beyond it because they just report a profit, any kind of profit high or low, in time of pandemic as shown below:
EPS After(Sell off)
EPS before (Sell off)
Johnson & Johnson
UnitedHealth Group Incorporated
Home Depot Inc
As you can see in the above table, all companies failed to break (EPS) made before the Sell-off except for Johnson & Johnson and Adobe Inc. Even these two companies their EPS reported in time of pandemic still within the average of their EPS for the last four quarters before the Sell-off.
Companies such as Visa and MasterCard which their services did not distributed by the pandemic failed to lead the market in this stage and they are moving below S&P 500 index.
Netflix the company that should be one of the most companies that generated profit during this pandemic due to the lock-down made by all governments, failed to make an EPS greater than the one before the lock-down.
All these factors (either Technical or Fundamental) suggested that the up-move for the market which started March 24, 2020 is just a pullback for down-trend that started in March 18,2020 and will resume its down movement. Either way for those who already in the market investing in good companies at least from their point of view they don’t need to panic because the market eventually if either went sideways or downtrend will resume its movement to up trend and break 3300 points level and go beyond that.
For those who still have their cash I suggested that they don’t get into market until the following conditions are satisfied:
The market need to go down and do not break the last support point which reached in March 23,2020 which was 2195 points, and make new higher low near to that level.
Or the market need to go up and break the last high that made in March 19, 2020 which was 3380 points and pullback to it with failing to break it, in down move.
Or fluctuate around SM(200) with going up and down two times at minimum in order to make sure it is a correction phase that will end within months or maximum a year before it started moving up.
Also companies that suppose to lead the market should provide new (EPS) higher than the previous one in order to validate their up-movement.
Before I explain the dividend yield, let me explain what is the dividend. The dividend is simply the amount of money that given to stockholder per year for owning stock on profitable company. This ranging from (0.5 $) to (20$) in some big companies. Once the company make profit each year they divided these profit over the number of shares and the result is dividend. Sometimes companies decided to distribute profit for the shareholders, but Some companies rather then distributed these dividend for shareholder, they either pay their debts which is good or make a new expansion by building new branches in order to increase their sales in future which will lead to increase their profit and (EPS) which is also good.
Dividend yield is a simple calculation which is dividing the dividend that the company distributed to shareholders , by the price of the stocks and multiply the result by 100:
To use this ratio ( dividend yield) to pick a good stocks, the only thing investor need to know is that when ever this ratio is higher than the average of ( 5 years dividend yield) the better is the company for investment. Because that means this stock which is under studying is undervalued and is a good candidate for selection.
To clarify the idea let assume that we have to companies A and B that have the following information:
Avg. Dividend yield 5yr
For investors that looking for undervalued company, they will chose company A over B because company A has higher dividend yield than B.
Note: in each ratio used to find undervalued companies has the price of share in the Denominator, always look for higher values.
Dividend yield can be used as (P/E). in order to end up with perfect company you need to compare it with dividend yield of other companies in the same sector as well as the dividend yield of the sector in general. Whenever you find company that had dividend yield higher than other companies and the sector in general, this company its stock price cheap compared to the profit that your are going to make form that price.