Is it me, or do some equity investors seem remarkably chirpy at the moment?

Stocks are “unusually cheap”, say Goldman Sachs’ analysts. “Valuations are cheap,” echoes Andrew Milligan of Standard Life. European fund managers “see the market as cheap,” trills S&P Fund Services. “Valuations within Europe are looking cheap,” cuckoos Luke Stellini, of Invesco Perpetual. “I’m optimistic about growth stocks… they are cheap,” twitters Stephen J. Lurito of American Century Investments. “Equities look cheap on many of our favoured measures,” chirrups Nigel Cuming, of Collins Stewart Wealth Management.

OK, we get the picture – or, rather, the sound: stocks are “going cheap”... and so, it seems, are they.

Now, far be it from me to interrupt this chorus of Easter chicks. But I can’t help but question the assumptions behind their calculations – and their cacophany. Fortunately, recent days have provided two ways to screen out the noise: new historical research, and a new online tool: the FT Stock Screener (http://markets.ft.com/ screener/customScreen.asp). Combine the two, and there’s less to crow about.

Take valuations using the price/earnings (p/e) ratio. Milligan is right to say that “valuations are cheap” in the UK, in relative terms, with the FTSE 100 p/e of 8.2 below its long-term average of around 13. Similarly, those European fund managers are right to note that “the current multiple for the overall market is around 8 times 2009 earnings – and at “an attractive long-term average” of 10, if moderate earnings cuts are factored in. However, closer scrutiny suggests this is not cheap enough.

Simona Paravani of HSBC Global Asset Management points out that although the FTSE 100 and DJ Euro Stoxx 50 fell by 7 per cent and 11.4 per cent respectively during February, the 12-month forward price-to-earnings ratios actually increased, “suggesting that a greater level of pessimism is being priced in”. Andrew Lapthorne at Société Générale is one such pessimist, telling the FT that earnings momentum remained “unequivocally awful”, with profits growth for this year estimated to be minus 40-50 per cent. So he prefers to use the cyclically adjusted p/e ratio, based on average earnings over the past decade, as advocated by Yale’s Robert Shiller. This is still above 10 for the UK market and, on those earnings estimates, can only come down if share prices fall much further. US investment writer John Mauldin also points out the deceptive nature of operating earnings – which ignore one-off charges, such as write-downs. Based on “as reported” earnings, the S&P’s 2009 p/e rises from 11 to 22. Historical p/e ratios put all of this into context: the S&P traded on 6 times earnings in 1949, and a low of five times in 1921 – a multiple that FTSE 100 fell to as recently as 1973-74, points out Milligan. Use the FT stock screener to screen out p/e ratios of 8 or more, and annual earnings growth of less than 10 per cent, and only 630 global stocks are “cheap”.

Take dividend yields. Goldman Sachs’ model factored in dividends, along with economic variables and the equity-risk premium, to conclude that stocks are “unusually cheap”. However, again, investors need to look forward and back. Quoted yields are based on previous payouts but S&P predicts 2009 will be the worst year for dividend cuts in the US since 1938, and Fidelity estimates that only 35 per cent of UK companies will increase their dividends each year for the next three years. Historical yields in the US average around 3 per cent so, with the S&P 500 currrently yielding 3.2 per cent, there is no obvious value there. Use the stock screener to screen out yields of less than 4 per cent (and outliers above 20 per cent) and you’re down to 291 “cheap” stocks.

Take momentum and mean reversion. Cuming at Collins Stewart believes the 56 per cent peak-to-trough decline in the S&P 500 has left the market “mispriced and oversold” to the extent that “equities are as cheap now as they were expensive during the dot.com era.” However, while history provides context, it doesn’t necessarily do corrections. As advisers Smithers & Co point out, the S&P 500 has bottomed at roughly 45 per cent below fair value in prior bear markets – but is “some ways” off past valuation bottoms based on Tobin’s Q ratio, of market capitalisations to the replacement value of assets. Adrian Lowcock of Bestinvest only rates the UK market fair value on this measure. And while other ratios, such as price to book and price to cash flow, suggest prices are at 20 year lows, he says: “No one ratio should be used on its own – each has its strengths and weaknesses.” Use the FT Stock Screener to screen out price to book ratios of more than 1, and price to cash flow ratios of more than 10, and, out of 34,767 global stocks, just 106 are “cheap”.

Try the screener for yourself. It could help to keep your nest egg intact for a little longer.
matthew.vincent@ft.com