Introduction

Since the Great Recession of 2008 came to an end, the stock market, as measured by the S&P 500, is almost midway through the 7th year of a strong bull run. This marks today’s bull market as the third longest in US history. Considering how traumatizing the Great Recession and the accompanying stock market collapse was for most investors, this should be good and comforting news. But unfortunately, the length and level of our current bull market seems to be conjuring up more worry and angst than comfort.

For some time now, many investors have been lamenting that stocks have become too expensive, and some are even playing the bubble card.  However, prudent investing requires separating fact from fiction. Therefore, prudence would also dictate taking a more analytical and less emotional evaluation of the true state and level of today’s stock market. Have stocks truly become too expensive to invest in, more to the point, have all stocks become too expensive in lockstep with the market? Perhaps recent market history and precedents will provide answers.

May 2015: A Fundamental Valuation Analysis of the S&P 500

Utilizing the analytical power of the F.A.S.T. Graphs™ fundamentals analyzer software tool, let’s take a factual look at the S&P 500’s typical valuation ranges over recent history. The current blended P/E ratio of the S&P 500 sits between 17 and 18 times earnings. If we review the historical normal P/E ratio of approximately 19 for the market since 1997, the argument could be made that the general market might be modestly undervalued.  However, that timeframe includes the high P/E ratios that the market traded at during the irrational exuberant period of the mid-1990’s to 2000 that skewed the average P/E ratio calculations upwards. 

Consequently, if we only include the timeframe 2002 to current, we discover perhaps a more appropriate historical normal P/E ratio of 17. On that basis, the argument could be made that the market, as measured by the S&P 500, is currently being valued at historically normal levels. This would indicate that the market is not necessarily cheap, nor is it significantly overvalued. Instead, it might be rational to conclude that the market is currently fully valued. In other words, the S&P 500 is currently not a bargain, but nor is it dangerously overvalued, at least based on recent historical precedent.

But most importantly of all, the above analysis supporting a fully-valued market in the general sense does not necessarily mean that all stocks are fully valued or even priced high if that is your view. Nevertheless, the above analysis does support the reality that with the market levels where they are today, it has become exceedingly more difficult to find sound investment opportunities or good bargains to invest in. This is a challenge for investors that currently have money that needs to be invested.  The good news is that there are still good and sound long-term investment opportunities available if you’re willing to look beyond generalities such as – the stock market is too high.

For loyal Seeking Alpha readers I offer this link to a past article that contains a live fully functioning F.A.S.T. Graphs™ on the S&P 500 that can be utilized to analyze the current state and valuation of the market.

Johnson Controls is Not an Overvalued Stock

Prudent long-term dividend growth or retired investors should not let market hype scare them away from this excellent long-term total return and above-average dividend growth investment opportunity. Although this company is not on the radar screens of many conservative long-term investors, I believe it has great long-term appeal. Johnson Controls (JCI) has paid a dividend every year since 1887 and increased its revenues for 62 consecutive years until the Great Recession. However, the interruption in growth was short-lived and the company is back on its typical growth track as I will soon illustrate.

Johnson Controls Essential Fundamentals at a Glance

Johnson Controls is an attractively valued high quality dividend growth stock possessing long-term appeal for potentially generating an above-average total return and dividend growth.  However, before digging deeper into the opportunity that Johnson Controls offers today, let’s start by taking a historical look at the company’s essential fundamentals at a glance through the fundamental analytical power of F.A.S.T. Graphs™.  The primary objective of this exercise is to establish a perspective of how well this company has performed as an operating business, coupled with how the market has typically treated that performance.

In order to establish the clearest perspective, I will start out by presenting the essential fundamentals of earnings and dividends without the emotional contamination that stock prices bring to the equation.  Additionally, I will first look at Johnson Controls over the timeframe 1996-2007 in order to analyze its operating results prior to the Great Recession. From there I will update to current time and review operating results during and after the Great Recession.