By Simon Black, Sovereign Man
October 28, 1929– 90 years ago today– is known as ‘Black Monday’ in financial circles.
The US stock market had peaked the previous month, on September 3, 1929, with the Dow Jones stock index reaching a record high of 381.
But throughout September and October, nervous investors began pulling their money out of the market.
And over a three-day period in late October (including Black Monday), the market lost more than 30% of its value.
Ninety years later, I thought it would be prudent to look at three key insights from that historic crash, starting with:
1) Stocks are more overvalued today than they were in 1929
Back in 1929, the price/earnings ratio of the average company trading on the New York Stock Exchange was about 15.
In other words, investors were willing to pay $15 per share for every $1 of the average company’s profit.
That’s not high at all. In fact, a Price/Earnings ratio of 15 is completely in line with historic averages.
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Coca-Cola’s Price/Earnings ratio back in 1929 ranged between 15 and 18. Today it’s 30… meaning that investors today are willing to pay roughly twice as much for each dollar of Coke’s annual profit.
Coca-Cola is actually quite an interesting case study.
If we just go back a few years to 2010, Coca-Cola’s annual revenue was $35 billion. By 2018 the company’s annual revenue had fallen to less than $32 billion.
In 2010, Coca-Cola generated $5.06 in profit (earnings) per share. In 2018, just $1.50.
And Coca-Cola’s total equity, i.e. the ‘net worth’ of the business, was $31 billion in 2010. By 2018, equity had fallen to $19 billion.
So over the past eight years, Coca-Cola has lost nearly 40% of its equity, sales are down, and per-share earnings have fallen by 70%.
Clearly the company is in far worse shape today than it was eight years ago.
Yet Coke’s share price has nearly DOUBLED in that period.
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