Is The Increase In Volatility Signaling A Dangerous Market Environment?

Therefore, when we shorten the timeframe covering only 2015 and 2016, the earnings and price relationship appears more rational. The normal P/E ratio of 7.4 (the dark blue line) for this time period clearly reveals that current market sentiment is very poor because of weak earnings. From my perspective, it is the weakening fundamentals that indicate to me that the stock might not be undervalued.

As I have often written, we can learn from the past, but we can only invest in the future. Therefore, a quick look at forecasts utilizing the normal P/E ratio as a valuation reference shows that future returns over the next year or two might not be that exciting if the 7.4 normal P/E ratio holds.

However, thus far we are only looking at Chicago Bridge & Iron Company N.V. (NYSE:CBI) based on operating earnings, but operating earnings are not the only fundamental metric to consider. They represent a good starting point, but I always suggest that subscribers take advantage of all the analytical horsepower that F.A.S.T. Graphs™ offer. Personally, after I look at earnings, I typically move on to cash flows.

When I examined CBI based on operating cash flows, the recent precipitous stock price drop makes a lot more sense. Cash flow generation has been horrible since 2011; therefore, this fundamental metric does not suggest undervaluation in 2014 and 2015 as operating earnings might have appeared to.