Daily Spotlight

Value Sectors

Each month, we examine at an aspect of sector investing. This month, we are looking at growth and valuation. Investors hunting for stocks that reasonably balance long-term growth prospects and current value characteristics might want to look at companies in the Healthcare, Financial, and Communication Services sectors. These are among the industry groups that are selling for (price/earnings)/(growth+yield) ratios at or below the S&P 500's ratio of 2.1. To generate the PEGY ratios, we use the P/E ratio for each sector based on forward earnings for the numerator. For the denominator, we average the growth rates for the past five years along with two years of forward estimates, this in order to achieve a less-volatile earnings-growth rate trend. We then add the current yield to approximate total return. As an example, the current S&P 500 P/E ratio is 21, the current yield is 1.1%, and the historical growth rate is 9%. The formula is 21/(1.2+9.0) = 2.1. Sectors with favorable growth and valuation characteristics, in addition to the three listed above, also include Energy and Materials. Premium-valued sectors with low growth rates include the Consumer groups. Based on our analysis of growth rates and valuations, along with other factors, we have established our over-weight sectors as Information Technology, Financial, Utilities, and Communication Services. Our under-weight sector is Consumer Discretionary. Our Market-Weight sectors include Energy, Consumer Staples, Healthcare, Materials, Real Estate, and Industrial....  for each sector based on forward earnings for the numerator. For the denominator, we average the growth rates for the past five years along with two years of forward estimates, this in order to achieve a less-volatile earnings-growth rate trend. We then add the current yield to approximate total return. As an example, the current S&P 500 P/E ratio is 21, the current yield is 1.1%, and the historical growth rate is 9%. The formula is 21/(1.2+9.0) = 2.1. Sectors with favorable growth and valuation characteristics, in addition to the three listed above, also include Energy and Materials. Premium-valued sectors with low growth rates include the Consumer groups. Based on our analysis of growth rates and valuations, along with other factors, we have established our over-weight sectors as Information Technology, Financial, Utilities, and Communication Services. Our under-weight sector is Consumer Discretionary. Our Market-Weight sectors include Energy, Consumer Staples, Healthcare, Materials, Real Estate, and Industrial.  more

Market Podcast

Analyst
Quick Notes

Weekly Economic Commentary