Kim Shannon - Price earnings multiples and long-term returns
[hana-flv-player
video="http://clientinsights.ca/files/Video/9581.f50c8b4e67bb38a7fb9a461c0f3206cf.flv"
player="2"
more_2="showVolumeSlider: false,showMuteVolumeButton: false, showMenu: false, controlBarBackgroundColor: 0"
/]
Interview: Kim Shannon, President & CIO of Sionna Investment Managers, and Fund Manager at Brandes Investment Partners, discusses price earnings multiples and long term returns with Dan Richards.
Transcript:
Kim Shannon discusses the impact of PE multiples on long term returns.
Dan Richards: Why are PE multiples so important?
KS: PE multiples give a measure of how expensive the overall market is. The long term average for PE multiples is approximately 14 times, so if you see a PE multiple of 5 times, or 5 years of current earnings to pay for itself, you know that that market is inexpensive, versus a 25 times PE multiple.
DR: We saw 5-6 times roughly in 1982, is that right?
KS: 1982 would have been more like 6 or 7 times, and then at the peak of the market in 2000, we would have seen numbers in Canada in the high 20s (times earnings) and in the mid-30s in the U.S.
DR: So a pretty broad range; Where are we today in the market in terms of multiple?
KS: In Canada right now, its in the high teens, about 18 or 19 depending on the day.
DR: Can you point to a specific pattern in terms of what happens to returns when you enter the market at a cheap multiple compared to an expensive multiple?
KS: There's a very interesting study out of the U.S. looking at the market going back to 1871, and it shows very clearly, that when you enter the market at cheap PE multiples, your long term returns are very generous, and at the upper end of the range. Conversely, when you enter the market when its at very expensive PE multiples, the long term returns are below average, and in fact, there's an opportunity set of actually getting a negative returns.
DR: And is that why the investor experience throughout the last decade has been so bad?
KS: Absolutely! In fact that study is very predictive of what happened. We had extremely high PE multiples, the top decile of PE multiples, and that would have forecast a return of on average, close to zero. And you could fall into negative return, and indeed that's what happened.
DS: Someone listening to this interview might say, "Well we're not at that 30 or 35 times level, but we are expensive by historical standards, so does that just mean I should stay away from stocks entirely?
KS: I think that what people should be cautious about is that we are in a low return environment, and I think that its important to set your expectations correctly on that front. At any point in time in the market, you've got expensive stocks, and cheap stocks, resulting in the average, and our focus as a value manager is to try and buy a basket of the cheaper names. so in any market environment we're attempting to try and get better long-term returns than the overall market or a passive style would get for investors.
DR: Kim, thank you very much!
[CSSBUTTON target="http://www.clientinsights.ca" color="23238E" textcolor="ffffff"]Access many more Dan Richards' interviews at ClientInsights.ca[/CSSBUTTON]
Comments are closed.