Gauged by historical profits, stocks were cheaper last week than they have been in years. Maybe decades. At last week's Dow Jones industrial average close of 8,852, the 30 companies that constitute the index were selling for an average of 11 times their earnings for the past 12 months.
Contrast that with the 27-times earnings that the Dow sold for in 2000. If today's investors thought trailing corporate profits were worth that much, the Dow would be almost 22,000, not less than 9,000.
Amid overblown fears of a new Depression, some stocks already trade for Depression-cheap prices, Jason Zweig wrote recently in The Wall Street Journal.
"Out of 9,194 stocks tracked by Standard & Poor's Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year - or at levels less than half the long-term average valuation of the stock market as a whole," Zweig wrote. "Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash - an even greater proportion than [legendary value investor Ben] Graham found in 1932."
Which is to say, you could buy the company, drain the cash, pay yourself back what you spent and still own the business. That's cheap.
Of course, profits on the books are no guarantee of what's to come. Stocks are valued on expected future earnings. If this economic slump is as long and as bad as many economists believe, earnings will get plastered. Still, if you liked the Dow at 27-times historical earnings, you ought to like it at least twice as much at 11.