Are Stocks Cheap Now? Get GAAP If You Want To Get Real

The times they are a changin’. In the ’80s as well as the ’90s, corporations reported quarterly results that corresponded to generally accepted accounting principles (GAAP). These days, the vast majority of companies report “pro-forma” earnings that adjust for unusual, special or one-time circumstances.

Take a look at the dramatic rise in the percentage of companies serving up adjusted profits per share rather than GAAP-based results. In June of 2010, 70% provided adjusted earnings. However, as the pressure to engineer gains in bottom-line profitability has mounted, more and more corporations have resorted to non-GAAP reporting. Roughly 90% of companies felt the need to manipulate their presentations to the public by June of 2015.

Not a big deal, you say? The S&P 500 SPDR Trust (SPY) trading at 193.75 represents a price-to-earnings (P/E) ratio of roughly 16.5 only if you incorporate pro-forma earnings. If you are inclined to employ GAAP earnings – the less manipulated version of reported earnings – the P/E moves up to approximately 21.5. In other words, even with the S&P 500 close to 200 points below its high-water mark, stocks are not exactly the cellar-dwelling bargain that a value investor craves.

In truth, S&P 500 earnings peaked in 2014. You wouldn’t know it from a year-by-year presentation of pro forma/adjusted results alone. You might have believed that S&P 500 earnings rose form $60 per share in 2009 to $120 per share in 2014, and that they merely took a breather in 2015 by holding steady near $120 per share.

Unfortunately, you’d have been misinformed. A side-by-side visual comparison with GAAP S&P 500 earnings demonstrates how earnings hit their pinnacle near $100 per share in 2014; meanwhile, there has been a 12.7% erosion to nearly $90 per share in 2015. Earnings per share haven’t fallen that hard since the systemic financial collapse year of 2008.