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TheStreet Open House

Country ETFs vs. U.S. Stock ETFs

Stock quotes in this article: EWQ, EWK, EWT, EWZ, THD, AAPL

NEW YORK ( ETF Expert) -- Over several decades, I have produced content for radio, television, magazines and Web sites. One of my longest-standing themes has been the silliness surrounding what constitutes a "bargain" in a stock market.

Advocates for employing price-to-earnings ratios (P/Es) debate whether to use trailing 12 months or forward 12 months or trailing 10 years. Some even adjust the target based on comparable bond yields, historical averages and inflation, while others decide "appropriate" P/Es based on a particular sector.

Still others believe P/Es are entirely over-rated, and prefer to use price-to-sales ratios or price-to-book in making their "call." Meanwhile, some may rely more on price alone such that, if the S&P 500 were 15% below a high, that would represent a 15% discount.

Simply put, if gurus cannot agree on what determines a decent value, how can investors be any more proficient at selecting sure-fire winners for the so-called long haul? They cannot... or we might all be tripping over ourselves to buy Apple (AAPL) at $425.

In spite of widespread inconsistencies and inanities, I admit to a fondness for historical data. I recently came across an article that presented a country-by-country breakdown for current and median 10-year price-to-earnings ratios (a.k.a. CAPE or cyclically adjusted P/Es). The authors provided evidence that the best investment returns in U.S. stocks occurred when buying and holding U.S. stocks for a decade at the start of a calendar year when the average cyclically adjusted P/E was 30% below the median.

Now, as much as the value-seekers believe there is a Holy Grail in finding good things to buy-n-hold, I recognize the mathematics of compounding require unemotional methods for risk reduction. Collapses, crashes and market catastrophes tend not to discriminate.

Indeed, for all the attention placed on the S&P 500 approaching its highs of 2007, investors who minimized exposure to the 2007-2009 disaster were more likely to recover in 1-1 1/2 years rather than 5 1/2 years.

Nevertheless, it may be reasonable to assume one is taking a calculated risk when he/she invests in a country that is currently 25%-30% below its median cyclically adjusted P/E. Here, then, are five countries with roughly 25 years of data (or more) that meet this valuation criteria... and a few prominent countries that might be considered "overvalued."

Country 10-Year P/Es: Recent And Median
Current CAPE Median CAPE Difference
Undervalued?
Singapore 12.5 21.7 -42.4%
France 12 19.7 -39.0%
Belgium 10.3 14.8 -30.6%
Brazil 12.1 17.2 -29.7%
Taiwan 14.3 19.4 -26.3%
Overvalued?
Thailand 16.4 12.1 26.2%
United States 20.7 15.9 23.2%

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