Forward Price/Earnings Findings
26% of large companies, 37% of mid-sized companies, and 53% of small companies are trading at 24x next year’s earnings (or higher). Meanwhile, roughly 15% of all companies are expected to trade at 12x next year’s earnings (or lower). This means that 85% of the companies are not what we would consider to be cheap. The Forward P/E measure does look better than the trailing 12-month counterpart of P/E, but investors must understand that analysts are often too optimistic about a stock’s prospects, and these numbers are frequently revised downward.
It may make sense to sometimes overpay for a company, if one has some strong research to back up that the company will grow its profits substantially and justify a higher price multiple. So how many companies are expected to grow less than 10% vs. those that are expected to grow by more than 30% for the next year?
Earnings Growth Findings
Somewhat surprisingly, many of those companies that have either a high P/E or high Forward P/E, are actually not estimated to grow by a whole lot in the next year (as it relates to profits). In fact, 32% of large companies are expected to grow by 10%, or less. This compares with 38% of mid-sized companies and 37% of small companies that are expected to grow the bottom line by 10%, or less. There are, however, a fair amount of companies that are expected to grow by roughly 30%, of more. 28% of large companies, 29% of mid-sized companies, and 28% of small companies are expected to grow by 30% or more. Roughly 8% of all companies are expected to grow by less than 10% and also have a forward P/E multiple of 24, or more. This is not an attractive combination for investors – low growth and rich price.
Companies in a Bear Market vs. Companies that are Near a High
With the recent volatility, and with the S&P 500 off roughly 7% from its January high, one wonders how many companies are still exhibiting strong momentum and moving higher vs. how many companies are in a full-fledged bear market.
Bear Market vs. Near High Findings
For the largest companies, roughly 17% are in a bear market (defined as a 20% or more drawdown in the last year) while 9% are within 2% of a 52-week high. For mid-sized companies, 25% are in a bear market and 10% are near a market high. For the smallest companies, a whopping 45% are in a bear market while just 5% are near market highs.
While the S&P 500 is 7% off its record high, and 13% above its 52-week low, there are a greater percentage of smaller companies that are in a bear market (at this point), and not very many that have achieved new highs are able to stay close to those highs.
It can be exciting to find companies that pay a good dividend yield, are attractively priced, are substantially growing their profits, and are also exhibiting strong price momentum. The challenge is that these companies are not actually easy to find, even in the current higher volatility environment.
Of the companies in the Russell 3000, just 12 of them meet the criteria for high dividend yield, low P/E, and high earnings growth. Of the 12, only two are showing good momentum. The strongest value companies right now are more likely to be in a bear market, and the strongest momentum companies are likely to be very expensive with minimal yields. Balancing momentum with value, which have very low correlations with each other, is key. Having too much momentum or having too much value can be detrimental to long-term portfolio returns.
We will continue to evaluate portfolios for fluctuating exposures to any factor and adjust the portfolios when necessary.