Relative Valuation and Stock-Market Bubbles

The subject of this study is the use of relative valuation methods for estimating the value of companies and for analysis of the stock market as a whole. The study uses the findings of earlier studies of the author in the subject area. It can be viewed as a kind of extension and update of these previous studies in certain aspects, which is extended to include the post-crisis period. The focus is put on the specific features of the price-earnings and the price-to-book ratios, including on certain weaknesses, related to using these market ratios for explaining the levels of major stock-price indexes. A review is made of the dynamics of some major stock indexes before and after the global financial crisis, as well as of the corresponding price-earnings and priceto- book ratios on the US capital market. The same is done for the Bulgarian capital market. Fundamental price-earnings and price-to-book value ratios are estimated and compared with the respective real market ratios of both the US and Bulgarian stock indexes. The results of the study show that during the period prior to the financial crisis, the average levels of the actual ratios on both capital markets were much higher than the levels, suggested by fundamentals. During the early years of the post-crisis period this changed significantly and the market ratios became quite close to fundamental ratios. However, the PE and PBV ratios of the last couple of years have again exceeded their historical average levels, as well as the levels of the corresponding fundamental ratios.