Tags: siegel | stocks | undervalued

Siegel: Stocks Still Hugely Undervalued

By    |   Monday, 13 Apr 2009 10:08 AM

Economist Jeremy Siegel, who has invited ridicule by extolling stocks at their peak, is at it again.

He writes on Yahoo! Finance that Standard & Poor’s understates earnings for companies in its 500 stock index and thereby hides the fact that stocks are undervalued.

Siegel’s argument: “Although the S&P weights each individual's stock by its market capitalization to compute the return on the S&P 500 Index, no such methodology is used to compute aggregate earnings of the index.”

As a result, he says, “the billions of dollars of losses racked up by, say, AIG, whose market value is extremely low, is added dollar for dollar to the earnings of the profitable firms, such as Exxon Mobil, whose market value is more than 20 times larger.”

Bottom line: “The methodology gives far too much influence to firms with big losses and low market values, and thereby gives a distorted valuation to the index,” Siegel says

Siegel instead wants to weight the earnings of each company by its current market value, in a fashion identical to the way the return on the index is computed.

“This alternative methodology leads to substantially higher earnings for the index than does the S&P methodology,” he writes. “The true valuation of the market is nowhere near as dismal as the aggregate earnings reported by S&P suggest,” Siegel says.

Others too see value in stocks now. BlackRock strategist Bob Doll tells CNBC that investors should flee Treasuries in favor of equities.

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Economist Jeremy Siegel, who has invited ridicule by extolling stocks at their peak, is at it again.He writes on Yahoo! Finance that Standard & Poor’s understates earnings for companies in its 500 stock index and thereby hides the fact that stocks are undervalued.Siegel’s...
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2009-08-13
Monday, 13 Apr 2009 10:08 AM
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