Giving Dougie His Due: Stock Valuations, Key Government Stats Can't Be Right
Why I share Doug Kass' skepticism around stock market valuations and key government statistics.
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I will start my column this Friday with a "shoutout" to my friend Doug Kass. Unlike so much of the financial punditry, Dougie feels no need to fill space with "happy talk." He is never afraid to tell things like they are, even when his takes may not be what most investors want to hear. He also owns up to his wrong calls, another rarity in this space.
Doug was at his pithy best on Thursday and dropped the following among several gems in his Daily Diary:
- "I call BS to the level and the manner in which S&P EPS are calculated in order to support bullish valuation arguments."
- "And to government statistics that are not worth the paper they are written on."
That kind of talk doesn’t land you a repeat gig on FinTV for the most part. Both takes were also correct in my opinion.
I will take Doug’s second comment first. My long-time readers know I have questioned the monthly CPI reports that provide the "official" measure of inflation for many years. Any inflation calculation that does not include measures for mundane things like taxes and user fees, includes "hedonic adjustments" and has healthcare insurance premiums falling over the past three years, has to be taken with a huge grain of salt.
This is why I continue to believe that inflation is higher than reported and is a key reason why a large portion of the consumer population remains under considerable pressure.
Inflation is not the only thing the government can’t seem to get a good measure of. Labor market reporting has become a bit of a farce over the past few years. Most Bureau of Labor Statistics (BLS) monthly jobs numbers have been consistently revised down since the start of 2023. Then, on August 21, 2024, the BLS whacked its previous estimate of job growth from March 2023 to March 2024 by a whopping 818,000. This represented 31% of the previous estimate and was the second-largest jobs revision in the history of the BLS. Let’s just say this government agency has little credibility in my eyes at the moment.
In addition, the market is currently ignoring valuation metrics that showed the overall market is as or more overvalued than it was heading into 2022, just before the big whoosh down in equities that year. By some measures (i.e., market-cap-to-GDP ratio) we are in the end of the Internet Boom territory.
I am seeing more and more significant divergences in GAAP and non-GAAP earnings in companies that I analyze in 2024. In addition, many companies are trading at valuations that make no sense.
Take Lennox International LII, a company I took a quick glance at recently. Lennox is basically a large HVAC manufacturer and distributor. Earnings should be slightly down this fiscal year on 2% to 3% sales growth. And yet, the stock is selling for more than 28 times forward earnings on a non-GAAP basis. Add in a sub-1% dividend payout and a just over 2.5% free cash flow yield, and I struggle around how this sort of justification can be remotely justified. I am not picking on Lennox, I could have highlighted scores of other S&P components and reached the same conclusion.
Which leaves me with an overvalued market and government statistics I don’t entirely trust. This places me in Kass’ camp and very conservatively positioned within my portfolio as I expect volatility to pick up in the months ahead.
At the time of publication, Jensen had no positions in any securities mentioned.
