Tuesday, April 22, 2014

LargeCaps Are Cheaper Than SMidCaps (excerpt)

So far this year, the SMidCaps have been trading around valuation multiples of 17-19, while the S&P 500 has been hovering around 15. That suggests that the bubble this time is in small stocks. Indeed, the forward P/E of the Russell 2000 universe of these stocks, at the end of March, was 24 for the composite, with the growth and value components at 30 and 20, respectively.

The Russell P/E is significantly higher than the S&P 600’s current reading of about 18 because it includes more stocks of companies that either have no earnings or are losing money. Yet investors are willing to pay high prices for them, expecting that they will eventually have great earnings. These great expectations more often than not end very badly once these companies actually start earning money. When they do so, it becomes obvious how dangerously overvalued these stocks are, especially if growth expectations turn more realistic and less fanciful.

By the way, while the forward P/E of the S&P 500 was 15.5 during March, the median forward P/E was 16.6. This indicates that the larger-cap stocks are more fairly valued in the S&P 500 than the smaller-cap ones in this universe of LargeCaps. Back during 1999, the reverse was true.

Today's Morning Briefing: Bubbles & Clouds. (1) Bubbles now and then. (2) Small stocks are more inflated than large ones. (3) Russell 2000 forward P/E at 24 thanks to lots of small companies with no earnings. (4) S&P 500 also has some high-priced industries. (5) Is the Cloud a bubble? (6) Defensive sectors are no bargains. (7) No national real estate bubble yet, but competition to make risky home loans is heating up. (8) European peripheral bonds rally like the worst is over. (9) Are ETFs the next weapon of mass financial destruction? (10) “Captain America” (-). (More for subscribers.)

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