Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 552

Finding single-digit PE stocks in an overvalued market

The most interesting high-level observation on markets at the moment is the fact that they are selling at an all-time high despite the elevation of geopolitical tension, complete confusion on the forward path of the economy, and the increasing technical skew in market indices that is no doubt a function of the never-ending march of passive investing.

Geopolitically, we have the real threat of war in Taiwan, the ongoing war in the Middle East, and the tragic war in the Ukraine.

On the economy, PM Capital’s view has not changed. We always thought that the economy would sustain itself through 2024 and that there was now a higher floor in inflation, meaning that although rates have gone up enough to dampen an already slowing economy, with higher embedded inflation and an economy that was in reasonable shape, it was unlikely that rates would need to fall too much or too soon. Central bankers could afford to be patient and historically, 4% interest rates are not that high especially given higher embedded inflation.

I would also reiterate the danger of making decisions based on macro-economic forecasts. In the last 12 months, market sentiment was convinced of the imminent recession, then became convinced of a soft landing, then started talking about no landing and now economic indicators are suggesting an upturn. Who knows?

The other feature of today’s markets is the unhealthy concentration of daily trading and the impact on market performance of what was the top ten stocks in the United States, then becoming the Magnificent Seven and the way it is going, likely to end up in the one and only – Nvidia.

It is interesting to note how the industry is always rabbiting on about concentration of risk yet here we are today with the greatest concentration of risk in the fewest stocks that we have ever seen. That creates the perfect opportunity for investors to diversify from that risk and take advantage of where the valuation opportunities are.

1 CBA = 3 of Europe’s top banks

That brings me to my favourite topic – Valuation.

Back in October we highlighted that “when I look at our portfolio, valuations still appear to be in our favour. …the overall Price-Earnings ratio of the portfolio is in absolute terms, probably as low a number as I can recall”. So, the uplift in the market from the September lows has not really surprised me.

What does surprise me is that valuations in some of our investment themes are more like what you see at the bottom of a market, not the top. Single digit PE ratios and double-digit dividend yields.

The most extreme example is our European Banks, selling on a 6x PE and a 10% dividend yield*. Here is an interesting anecdote.

CBA, the largest bank in Australia, has a market value of circa $200 billion and receives $1 of every $10 that flows into the Australian Stock Exchange from passive funds^. For $200 billion, you can buy some of the largest retail banks in Europe, like Lloyds in the UK, Caixia Bank in Spain, plus Intesa in Italy. The population of Australia is nearly 26 million. The combined population of the UK, Spain, and Italy is over 170 million. We are short CBA and long Lloyds, Caxia and Intesa.

Source: Morningstar

The point is that there are extreme valuation differentials in markets today and being passive (through index investing) is not the way to take advantage of them.

A further valuation anomaly

Another valuation extreme is the US dollar.

Having visited the United States twice in the last three months, it was quite stark how significantly prices have increased post-Covid and, in Australian-dollar terms, made you feel like a pauper.

Nominal prices are pretty much the same as Australia but after adding the 10% state tax, the 4% charge they now automatically put on your bill for the kitchen staff, then the 25% tip the waiter is expecting and converting into Australian dollars, the price is twice what you pay in Australia. So, an average pizza and beer at an average sports bar, is approximately A$80.

Source: Trading Economics

In another anecdote on the impact of Covid and why inflation is embedded in the system, I walked into a convenience store to get a bottle of water. I went to the counter to tap with my card and, before I tapped for the final amount, the machine asked if I would like to tip 20, 25 or 30%. No thanks…


Paul Moore is the founder and Chief Investment Officer of PM Capital. The information herein may change without notice, does not constitute advice or a recommendation, and does not take into account the objectives, financial situation or needs of any investor which should be considered before investing. Consider the PDS and Target Market Determination available at and seek financial advice prior to making an investment decision. Past performance is not a reliable guide to future performance. The return of capital, or rate of return, is not guaranteed.


*As at 29 February 2024.
^Market capitalisation of ASX:CBA as at 19 March 2024 is $195 billion, source: ASX



Australia lags global dividend bonanza

Why the ASX 200 has gone nowhere in 16 years

The power of dividends


Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

How not to run out of money in retirement

The life expectancy tables used throughout the financial advice and retirement industry have issues and you need to prepare for the possibility of living a lot longer than you might have thought. Plan accordingly.

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Latest Updates

Financial planning

Our finances should enable and not dictate our lives

Most people would prefer to have more money than less of it. But at what point do the trappings of wealth and success start to outweigh the benefits of striving for more?


This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.


Emerging market equities are ripe with opportunity

Emerging markets offer compelling value compared to history and the stretched valuations of developed market equities. Investors can benefit from three big tailwinds, but only if they are selective.


Tomorrow's taxpayers pay for today's policy mistakes

Less affordable housing isn't the only thing set to weigh on Australia's younger generations. If new solutions for pension deficits and the use of resource revenue aren't found quickly, tomorrow's taxpayer will foot the bill.

How would a switch to nuclear affect electricity prices?

The Coalition's plan to build seven nuclear power stations in 15 years faces scrutiny due to high costs and slow construction. And it is unlikely the investment would yield cheaper energy for Australian households and industry.


Reader feedback from our 2024 survey

Articles that are easy to understand, quick to read, and credible; being able to engage via the comments section; and keeping Firstlinks free and independent are just some of the features valued by our readers.


Have your say on Firstlinks and the topics we cover

We’d love to hear your thoughts on Firstlinks and how we can make it better for you. If you’d like to help us out in a just a couple of minutes, please take our short survey.



© 2024 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.