Here is the latest value spread update for July from Validea’s market valuation tool. Rather than focusing on market-cap weighted indexes like the S&P 500, our tool focuses on the valuation of the average stock relative to history. We use the median of our investable universe of 2700 stocks to perform the calculation. To compare value vs. growth, we look at the top decile of the cheapest stocks and compare it to the top decile of the most expensive stocks.
Despite the recent market decline, value stocks got a little more expensive relative to growth in July. They currently sit in the 25th percentile using the TTM PE Ratio, meaning they have been cheaper 25% of the time historically. Despite the increase, value stocks still look cheap relative to growth stocks on a historical basis.
Using the current year earnings estimate yields similar results. Value got a little more expensive in July due to its strong run, but it still is cheap relative to history.
The spread based on the Price/Sales also paints a similar picture. On a relative basis when compared to growth, value is in the 32nd percentile. On an absolute basis, it is more expensive using Price/Sales than the other metrics. This is due to profit margins being high relative to history.
Value spreads are not useful indicators in terms of predicting short-term market movements. They can, however offer interesting information for long-term investors who want to put current conditions in a historical context.
Further Research
