Validea’s Market Valuation Report: Large-Caps Looking Ultra-Pricey

One of the focuses of Validea’s Guru Investor Blog since its inception has been to summarize the opinions of leading market experts on the current market valuation and how that fits into a historical context. To that end, we regularly present a variety of data on both sides of the market valuation debate, which often can lead to different conclusions, but that we hope leads our readers to be more informed about how leading experts look at the market.

Since 2005, we have also been maintaining our own internal valuation data, and we often find some interesting information within that data that we think we help our readers look at the current market and how valuations relate to what they have been historically. This post is the first in a series of regular posts where we will look at our internal valuation data and the insights we think it offers into today’s market.

All of our valuation data is calculated using a median of all stocks within the market segment we are looking at. A median is calculated by simply ranking all stocks by the ratio we are looking at and then selecting the value that is directly in the middle. We think this is a better method than using a traditional average (or mean) because it is not unduly influenced by outliers. For example, a company with a PE of 10,000 would unduly influence a mean calculation, but will not do so with a median.

It is also important to note that market valuation has not proven to be a predictor of near-term future returns. High and low valuations can persist for long periods of time. Valuation data can be helpful, however, in determining where valuations are in the context of where they have been historically and also whether there are areas of opportunities in the market that present more attractive valuations vs. others.

For our first chart in this series, we look at the current market PE using trailing twelve month earnings. As the chart below illustrates, all segments of the market are trading at valuations between 10% and 26% above their historical averages.

The most interesting data, however, is in the relative valuations. The relative underperformance of small-cap stocks in the past couple of years has created a situation where they trade a significant discounts to large and mega-cap stocks. Large-Cap stocks are trading in the 100th percentile based on their 12 year average valuation, meaning they have never been more expensive in the 12 year period, and mega-cap stocks are trading in the 94th percentile. So based on the TTM PE Ratio, large and mega-cap stocks look extremely expensive. Small-cap stocks, on the other hand, look more slightly overvalued relative to their historical average, but very undervalued when compared to their large- and mega- cap counterparts. Small-caps have only been cheaper, relative to large-caps, 1.2% of the time going back to 2005.

TTM Price-to-Earnings Chart

TTM Market PE

quad tte


Conclusion: The market is trading at an above average valuation using the TTM PE ratio valuation factor. Large and mega-caps appear very expensive at current levels based on historical standards.