By Justin J. Carbonneau (@jjcarbonneau) —
“Where’s the beef”, the popular quip from the 1984 Wendy’s commercial showed three women looking at a big, fluffy bun with expectations of an equivalent sized juicy burger. But when they remove the top bun, disappointment sets in. A burger 15% the size the bun with a little pickle on it. One woman asks, “where’s the beef”? In today’s market, “where’s the beef” could be replaced by “where’s the value”? With the stock market at all-time highs and very expensive based on most metrics, investors are asking where the value is in today’s market.
By nearly all standard valuation metrics, the market looks very expensive at current levels – US Market Cap / GDP (i.e. the Buffett indicator), Enterprise Value to Sales, Enterprise Value to EBITDA and the Forward P/E are all basically pinged at the 100th percentile in terms of their valuation. This means the market has been never been more expensive than it is today based on these measures.
But that is not to say there are not pockets of value, or areas of absolute and relative cheapness, but you need to know where to look. Using our market valuation tool, we can look at the valuation of the US stock market and subsets of it like small, mid and large-cap stocks, value and growth stocks, and individual sectors, in a historical context. Our system looks at the valuation of the median stock in our investable universe from the beginning of 2006 to the present. On each date, we rank all stocks using a variety of valuation ratios and select the value for each metric that has half of the universe above it and half below. That becomes the median valuation for that day. Our market valuation page allows you to look at valuations on both an absolute and relative basis.
For this article, I am going to utilize the price-to-sales metric as the value metric. That is not to say the price-to-sales is better than any of the other metrics, but since revenue isn’t as easily as manipulated as earnings it gives us a less noisy denominator.
International vs. U.S.
When you look at International stocks in our universe, which is limited to the 600-700 ADRs we follow, International stocks don’t look very cheap. Collectively, International stocks have been cheaper as a group, based on the median price-to-sales, 97% of the time. When you filter it down to International Value stocks it gets a little bit better but still not great – International value stocks have been cheaper 75% of the time. But when you compare relative valuations – i.e. comparing International stocks vs. U.S. stocks using the median price-to-sales ratio, International stocks have only been cheaper relative to U.S. stocks about 2% of the time going back to 2005. Investors concerned about valuations in the U.S. may want to consider international markets, particularly international value stocks.
Another underperforming sector where valuations are low is the Energy sector. Energy stocks, based on the median price-to-sales ratio of 1.18, have only been cheaper 23% of the time. We know the darks clouds over the energy space – more electric cars, less air travel, more supply – all have impacted oil prices. Plus, the rise of environmental, social and governance (ESG) investment strategies, which underweight energy, are impacting demand for energy stocks. Now, if revenue for energy firms continues to fall over the next 12-24 months, many of these stocks actually aren’t that cheap at all but often times investors overshoot both the up and downside and energy might present an opportunity for valuation sensitive investors.
I was expecting to see energy pop up, but transportationwas a little surprising until I thought about it and looked at our Guru Stock Screener to see the stocks in the Transportation sector. Airlines, cruise ship operators, tankers and shipping companies. Many of these firms are still far below where they traded a year ago. While some transports have come back, many still are reeling. As a result, transportation stocks have been cheaper about 55% of the time based on the median price-to-sales looking back historically. But what I would also point out is there are still many transports down considerably that haven’t come back, and bottom-fishers may want to explore this corner of the market to look for those deep value opportunities.
All the hype around GameStop (GME) (see here: What the Hell Is Going On With GameStop’s Stock?) probably has some investors looking for other retail stocks with lots of short interest. While there are clearly still some beaten down names in the retail space, the overall group has bounced back considerably. The median price-to-sales ratio went from about 0.35 in March 2020 to 0.75 today, so it’s still below 1.0, but more than double where it was at the worst of the pandemic when stocks were selling off.
International stocks are trading at 1.00x sales.
Energy stocks are trading at 1.18x sales.
Transports are at 1.44x sales and retailers are at 0.75x sales.
Where are mega cap growth stocks trading you might ask – 10.1x sales. So these companies are being valued, based on their price-to-sales ratios, ten times higher than the four aforementioned parts of the market. While valuations can’t be used as timing tools, I think investors should be asking themselves where’s the value and where’s the beef.
Justin J. Carbonneau is VP at Validea & Partner at Validea Capital Management.
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