Wednesday, October 16, 2002

Bottom Fishing For Stock Bargains

According to Edward Yardeni's "Fed model," it's a great time to buy stocks.

An investment strategist with Prudential Securities, Yardeni derived this valuation technique from a 1997 monetary policy paper from the Federal Reserve. Roughly speaking, Yardeni's model (never endorsed by the Fed) says that the fair value price for the S&P 500 is equal to estimated earnings for the index divided by the yield on the ten-year Treasury note.

According to Thomson Financial, estimated next-12-month earnings for the S&P 500 now stand at $54.53 a share. Divide that by the 3.996% yield on the ten-year Treasury, and you arrive at a fair value price for the S&P 500 of 1,365. As of last night, the index closed at 881.

Thus, by Yardeni's model, the market is undervalued by 35%.

Full story at Forbes.com