Hi I’m Jimmy and this video I’m going to look at the current state of the stock market and different sectors in the stock market to try to determine if there’s still value opportunities available today. We’re going to use a price to earnings multiples to try to determine which sectors could offer the best value from an investing standpoint. So for anyone who has been following this channel well you may have seen our Dow 30 analysis where we’re analyzing all 30 companies in the Dow Jones Industrial Average. Then we’re gonna take that research and build three different portfolios of value a dividend and a growth portfolio. Well we’re almost done with the series and I’ve been prepping all my research for the three different portfolios. Well in working with the value portfolio I began to ask myself where’s the value in the stock market right now. And which sectors have the best investment opportunity from a value perspective. Because I figure if we have good answers to these questions well that could lead to even more profitable individual investments. So let me walk you through what I found. OK. This is a chart of the S&P 500 going back to 1990 and as we could see the market has done fairly well over the past 30 years or so. There were a couple major corrections and then we had the dot com bubble here the Great Recession here oil crashed back in this area and then we had some craziness that happened at the end of 2018. That sort of pulled back the market but we’ll come back to that in a minute. OK. So besides all that the market has done quite well. And if we just look at this chart all cleaned up well we might think to ourselves that the market is way too high right now. Look at how far it’s run since the Great Recession. But one thing that I’ve learned about investing is that everything is relative. And so many different things go into what makes the stock market move or an index like this or an individual company or an individual sector whatever it might be. There are so many different factors. So when I first looked at this chart well I thought to myself Should the market really be this high. It’s been one heck of a run over the past decade or so. How overpriced is the stock market right now. Well these bars these are the profits of the S&P 500 companies during the same time period. And to me what’s interesting and in hindsight probably quite obvious well that’s how in-line profits move with the price of the S&P 500. Now it’s actually vice versa it’s actually the price of the stock market follows along with profits. So it may look at the price of the S&P 500 and say that let’s say since the year 2000 the dot com bubble well the price has nearly doubled. And I’d say that’s true but so is profits and that’s what I mean by everything is relative to each other. So in a more interesting chart this is the price to earnings chart going back to 1990 for the S&P 500. The average PE ratio for this entire time period came out to be about 20x. It actually came out to be about 19x but we’ll just call it 20x to keep it simple. So the long term average for the P E multiple of the S&P 500 is right about here. Now this may seem like the stock market is currently undervalued since it is below its long term average. And this is true. But let’s look a bit closer. So if we were to zoom in to let’s say the past 10 years. Well this is what that chart looks like. And when I calculated the average of the P E multiple average over the past 10 years while that shook out to be about 17 and a half times earnings. So that puts the average right about here. So although the P E looks to be a bit high relative to the 10 year average. Well it is certainly much better than it was back at the start of 2018 thanks to the pullback that happened in 2018 but still at least the stock market seems at least somewhat overvalued right now. But I wanted to show you both this chart and the 30 year chart because I think it’s important to point out for all of us to remember how subjective investing really is. So I think it makes sense to use the past 10 years to determine the fair PE to use. But if you want to use the past 30 years data. Well I could easily make a case for that as well. But with the past 10 year P E multiple on average while the market looks a bit it’s expensive right now. But if we use the past 30 years the market looks a bit cheap and I think that this is key to investing. We need to get as much information as we can and then we can use that information to make the best decision based on what we believe to be the most important. But they’re all different sides to the story and we have to remember that there’s a fair amount of opinion in all of our decisions. So for what we’re doing here I think that it makes sense to use a 10 year number because personally I think that the past 10 years is more representative of the future of investing than the past 30 years. For example ETFs didn’t become popular until the past 10 years. And I think that this is going to have a big impact on the market going forward. But if you think differently you should adjust your research according to whatever you believe is important. OK. So now using the past 10 years as our average we get about 17x is the average. And then we throw in the current low of the S&P 500 which is about 19x so it seems that the market in general is overpriced right now. How about individual sectors. So what I did was I pulled down the data for each of the S&P 500 GICS sectors GICS stands for Global Industry Classification standard or system. I think it’s standard. Here’s the way it shaped up. First let’s start with the industries that according to their PE ratios are valued about the same as the S&P 500. So the first sector is the new communications services sector. This is this one as companies like Twitter Disney and AT&T in it. They have a PE of about 19x right now they’re about in line with the current level of the S&P 500. Next we have utilities at about 19x. Now this would actually surprise me a bit. I know that people have been worried about the stock market or market crash and utilities a very defensive industry. So I actually expected this one to be a bit more overpriced than it currently is. OK. Up next we have another defensive sector. Consumer staples consumer staples is currently trading at about 20x. Okay nothing too exciting. It’s slightly more expensive than the market that we have health care at a bit under 21x. Information technology is a bit over 21x. And then even higher is consumer discretionary at about 24x. Then we have real estate. Real estate has companies like Simon Properties or Boston Properties and they’re trading at about 47x but that’s actually fairly bad example for what we’re doing here because most of the companies in that portion of the S&P 500 all the real estate sections while their real estate investment trusts or REITs for short. And typically you wouldn’t use a price to earnings ratio to value a REIT for a REIT we should use something called net asset value. And if you’re interested in learning more about this type of valuation technique let me know in the comments below and I can see if I can go ahead to make a video on how that is done. But for now we’re going to skip real estate and we’re gonna move on to the more interesting sectors. So this brings us to some of the value opportunities that may be out there. The first one we have is industrials at about seventeen and a half acts which is about in line with our long term S&P average but also below the current level of the S&P 500. So it’s not great but it might be worth considering if you have some companies in that sector that you think are a real opportunity right now. Then we have energy. Energy is currently trading about 17x now energy is a very interesting one. Typically when I would value energy using EV to EBITDA which is Enterprise Value to EBITDA but PE would work if we’re careful about how we calculate it free cash flow would be another good one for energy companies. So if you have an opinion on where the price of oil or gas might be going then perhaps energy has some opportunities. But for me they’re not great just yet. Okay. Now this brings us to the last two sectors that appear to be the best value right now at least compared to the other sectors in the market as a whole. So the first one is the material sector coming in at an average PE of about 14x. This sector includes companies like ecolabs Vulcan Materials and Sherwin Williams. These seem like a great place to start to hunt for value. And if we were to pair that with the last sector which is the financial sector which comes in a bit above 13x in this industry as companies like travelers American Express Goldman Sachs and Berkshire Hathaway. So when I go ahead and build the value portfolio this is going to be my first stop. I plan on looking closely at the companies in this sector. Then I’ll look at the material sector and I work right my way right up the line looking for good value opportunities. Now it may be smart for us to dive into each one of these sectors at least the ones that look interesting and do a very similar thing to what we’ve done with the market here. We could take that sector and look at the history of the sector analyze the historical P E of the sector see where it currently ranks compared to its history. Are we sure that materials as an example isn’t historically very low. And then we could break it out by individual companies and see maybe by some industries break up the sub industries where do they rank break up the individual companies where do they rank compared to its own history. And then we narrow that down to a handful of companies that we think are very very interesting. Maybe we’ll get lucky at some of them we’ve already researched and if not we end up doing a deep dive on those companies. If this is something you’d like to see let me know which sectors you think are most interesting and we could start there besides that. What do you think of the process we use to try to identify value. Another thing we could have done is used price to free cash flow multiple and that I think that would yield some interesting results. Now it may makes more sense to save that for a deeper dive into individual companies and an individual sector analysis. So let me know if you found this interesting and let me know which sectors you think we should dive into maybe an industry or sub industry. Let me know what you think we should dive into next. And do you think that we should have used a 30 year average instead of the 10 year average. Either way let me know in the comments below. Thank you for sticking with me all the way to the end of the video. I really appreciate it. I’ll see in the next video. Thanks.