If you asked most people, they would say that the stock market is overvalued at the moment. We have historically high valuations and soaring price multiples. That being said, according to one metric, the S&P is still relatively undervalued.
Here's from an article from CNBC:
The "S&P 500 ... appears attractively valued on free cash flow yield due to reduced capex investment," David Kostin, chief U.S. equity strategist at Goldman Sachs, said in a report with other analysts Wednesday.
Other valuation metrics (ratio of enterprise value to sales, forward price to earnings and price to book) show the S&P between the 85th and 100th historical percentile, while the free cash flow yield hangs around the 50th historical percentile.
For those newer to investing free cash flow yield is a measure of financial performance based on a company's cash flow from operations, minus capital expenditures, divided by the stock's market capitalization. Most investors would conclude that a higher free cash flow yield is more attractive.
David Kostin, the GS strategist from above, recommends combining a high adjusted free cash flow yield strategy with a high growth investment ratio strategy. Kostin recommends American Airlines, General Motors, Eli Lilly, NetApp, software design and consulting firm Synopsys, and aerospace defense company Textron.
What do you guys think? Is there any validity to the argument that the equity market is overvalued? Do you like any of the stocks that Kostin mentioned?
