Keep Looking For Values

11/11/2013


The Dow Industrials have displayed discouragingly little follow-through after reaching fresh highs in late October, and recent weakness in the small-company stocks that have led this year's rally is a bit worrisome. Still, it is hard to argue the U.S. stock market's primary trend is anything but bullish, so probably the central question for a Dow Theorist is whether stocks have outrun their value. While that is not an easy question to answer, at least three conclusions seem clear:

• The typical U.S. stock is not cheap. Even for the large stocks in the S&P 500 Index, which are cheaper than small or midcap stocks, the average and median price/earnings ratio is near 20-year highs. The same is true for other valuation measures like price/cash flow and price/sales.

• Much depends on bond yields. Based on today's median earnings yield (earnings/price ratio) of 5.2%, the typical S&P 500 stock is more expensive than it was on about 76% of month-ends since December 1994. But the median S&P 500 earnings yield exceeds the average yield on Aaa corporate bonds by an atypically large 0.6% — higher than about 72% of month-ends since December 1994.

How much are bond yields going to rise when the Federal Reserve stops buying Treasury and mortgage bonds with newly created dollars? Answer that question and you'll have a good idea whether P/E ratios are too high.

S&P 500 STOCKS SEGMENTED BY TRAILING P/E RATIO
About 11% of stocks in the S&P 500 Index have trailing price/earnings ratios of less than 12, below the 19-year norm of 17%. The recent percentage of 11% is higher than only 29% of month-ends since December 1994. For middling P/E ranges like 12 to 16 and 16 to 20, the recent percentage is closer to historical norms.
% Of S&P 500 Stocks With Trailing P/E Ratio Of
0 To 12
(%)
12 To 16
(%)
16 To 20
(%)
Above 20
Or Negative
(%)
Recent percentage
11
18
23
48
Norm since Dec. 1994
17
22
20
42
Minimum since Dec. 1994
4
10
6
16
Maximum since Dec. 1994
14
21
21
43
% of month-ends lower
than recent since Dec. 1994
29
29
74
69

• You don't need to settle for a typical stock. As shown above, the number of truly cheap stocks is relatively low, but the proportion with modest P/Es of 12 to 16 is not far below historical norms. And if you take advantage of our quantitative-plus approach, you can build a portfolio of attractively valued growers, as shown in the tabel below. Our buy lists have 93% to 99% in stocks.

OUR BUY LISTS OFFER GROWTH AT A DISCOUNT
The median stock on our Long-Term Buy List delivered 15.4% per-share-profit growth over the last 12 months and ranked better than about 61% of U.S. stocks based on that growth rate. Yet the median Long-Term Buy trades at 14.5 times expected current-year earnings and is cheaper than about 76% of U.S. stocks based on that ratio.
---------- Quadrix Scores ----------
12-Month
--- EPS Change ---
12-Month
-- Sales Change --
Long-Term
Expected EPS
--- Growth Rate ---
-- Return On Equity --
Overall
Momen-
tum
Quality
Value
(%)
% Rank
Value
(%)
% Rank
Value
(%)
% Rank
Value
(%)
% Rank
Median of
Long-Term Buys
92
68
87
15.4
61
11.3
72
13.1
53
18.1
83
Median of Buys
94
68
87
18.9
64
11.3
72
13.1
53
18.0
82
Median of
Focus List Buys
95
80
88
19.3
65
12.0
74
13.1
53
18.4
83
Median of
all U.S. stocks
50
50
50
6.2
50
3.7
50
12.8
50
7.4
50
Quadrix
Value
Score
Trailing
---- Price/Earnings ----
Current-Year P/E
-- Next-Year P/E --
PEG (Forward
P/E Divided By
Expected Growth)
Enterprise
--- Value/EBITDA ---
Value
% Rank
Value
% Rank
Value
% Rank
Value
% Rank
Value
% Rank
Median of
Long-Term Buys
77
17.5
59
14.5
76
13.7
70
1.2
73
8.3
67
Median of Buys
77
16.1
65
13.8
79
12.7
76
1.2
73
7.4
75
Median of
Focus List Buys
77
15.0
71
13.8
79
13.7
70
1.3
71
7.0
78
Median of
all U.S. stocks
50
19.8
49
17.2
38
15.4
43
1.5
43
9.1
40

 


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