S&P 500: Even the Bottom 5% Is Overpriced!

Recently, I was reading a book about Sir John Templeton, one of the greatest investors of the 20th century, who had a nearly unparalleled long-term track record.

In 1939, while World War II was raging on, he bought 100 shares of every stock trading below $1 per share.

Four years later, a third of those companies were bankrupt. But with the remaining two-thirds, he had quadrupled his money.

So, I compared his situation to today’s. I found this chart of low priced stocks in the S&P 500. And sadly, we’re far from Sir John Templeton’s territory!

The top of this chart shows the S&P 500 as a whole, while the bottom looks at the 25th cheapest stocks in the index, or bottom 5th percentile. $6 a share would put us in Templeton’s range. But today, those stocks are right around $20.

S&P 500 and Price of 25th Cheapest Stocks in the Index

As you can see, today even the cheapest stocks are overpriced. We are in the second highest speculative phase in over 40 years. Only in the Internet Bubble were the bottom 5% of stocks priced higher than they are today, and not by much.

This indicator signals major turning points. We are in an extremely speculative phase of the market that, if history is telling, suggests now is the time to sell these low priced stocks, not buy them.

Of course, it’s never a good idea to use one indicator to trade the market. The market could go lower, and it could go higher. One indicator doesn’t tell the whole story.

However, this is a great indicator to make you aware of the fact that the market is in a speculative phase. And there’s no denying we’re in the riskier end of the spectrum.

If you sold in 1997 and 1998, you would’ve been too early. The same for 2007. But in my opinion, today looks like the right moment to rid yourself of these cheaper stocks if you have them.

It doesn’t take long for exceptional buying opportunities to re-emerge with these lower priced stocks. 1991, 2003, and 2009 all fit that bill.

The only thing required is patience.

John Signature
John Del Vecchio
Contributing Editor

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Categories: Stocks

About Author

In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.