YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

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Wells Fargo: A Heuristic Opportunity


Yesterday, the S&P 500 index closed at 911.29. We hear so many people ask the question, will the market keep going down or are we going to see a rally in the stock market? Now we have no crystal ball here at YCG (although we do have a rather large “magic 8 ball” on our desk – perhaps we should give that a shake?), but we shall go ahead an illustrate a few findings we’ve found interesting to note.

In our Q2 2008 client letter (and you can find this by clicking on “Literature —> Client Letters”) you will note on page 13-14 where we discuss price to sales and use the U.S. Market Cap over GDP to calculate the average and mean price to sales ratio for the last eighty-four years. The average has been $0.75 and we’re now currently right around the median of $0.70.

During the Great Depression the P/S ratio got to as low as $0.40. Now if we were to reach those same levels today, that would put the S&P 500 index below 500 and the Dow Jones Industrial Average below 4500. Now if this were to happen, we could easily be in the second Great Depression that this country has experienced. Not a pleasant thought, but still something that is not beyond all probabilities. Thus, we believe that at current levels the S&P 500 is right around fair value.

However, history has proven that the market overshoots both on the upside and the downside. We would not be surprised to see the market further decline and overshoot on the downside, but then again sentiment is so negative that perhaps we’ve already reached those oversold levels and are preparing for quite a significant rally in the next few quarters. How’s that for covering our bases or a head’s I win, tales you lose proposition.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Will Kruger | November 14, 2008 | Permalink

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