Wednesday, May 11, 2011

Relative Valuations

Health Care is cheap. This sector has been trading at an unusual discount ever since ObamaCare was put on the table starting in late 2008 during the presidential campaign. Information Technology is selling at 1.0 times the market’s multiple. That’s the cheapest it has been relative to the market since early 1996. However, it could remain this cheap for quite a while. Financials are at a discount, but they are not cheap considering that they’ve typically traded at deeper discounts in the past. That’s because they tend to blow up during financial crises that they cause on a regular basis.

Among the MEI sectors, Industrials are relatively expensive selling at 1.1 times the market multiple. That probably reflects a growth premium given that this sector is a major beneficiary of the global economic boom. After spiking during 2009 and 2010, Materials is trading at the market’s multiple now as forward earnings have caught up with the sector’s stock prices. Energy is trading at a slight discount. Its relative P/E has been quite volatile, but has tended to trade at deeper discounts than currently.
Telecommunication Services is trading at a relatively high 28% premium to the market. History suggests it is likely to revert towards the market’s multiple. Consumer Staples is at an 11% premium to the market, but it has traded at higher premiums in the past. Utilities are trading at the same multiple as the market currently.

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