JPMorgan Chase Equity Strategist Tom Lee Argues Stocks are Super Cheap

By on July 25, 2013

Thomas Lee - JPMorgan StrategistAdam Johnson’s “Chart Attack” segment on Bloomberg featured the views of JPMorgan Chase chief U. S. equity strategist Tom Lee.

Lee said they like to look at forward PEs and as the price moves up and earnings stay the same, PEs go up. Lee added there is a debate currently regarding what the PE on equities should be.

Lee said stocks should trade at a PE relative to other instruments. Lee attributes the upward move in equities to earnings growth.

Lee believes PEs on stocks will move up and investors will be surprised by how much PEs expand the next 2-3 years.

Lee said there is a PE ratio for corporate bonds (price divided by the interest payments). Income from bond coupons and dividends should be valued similarly, according to Lee.

Johnson presented a chart (see below) comparing the PE on high grade bonds, high yield bonds (junk), and equities. The chart indicates stocks could be considered undervalued. Lee pointed out that if you took the chart back 40 years, investors would be saying, “something’s wrong today because over the last 40 years stocks always traded at a premium to bonds.” “Starting in late 2009 stocks became cheaper than bonds and this situation hasn’t reverted back to normal,” Lee added.

JPMorgan Chase PE ratio comparison

Lee said he considers bonds fairly valued relative to interest rates and default risk, while stocks remain super cheap which is why there have been record buybacks.

Back in March, Lee said the economy was in a capital goods cycle and the equity bull market would continue for another four years [link].

One Comment

  1. Anton Phibes

    July 29, 2013 at 2:21 pm

    Mr. Lee is definitely onto something here. Stocks could soar if growth picks up for they are certainly reasonably priced against the alternatives.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>