is the Stock Market Too High? 2 Sectors that are Value Investment Opportunities Today
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is the Stock Market Too High? 2 Sectors that are Value Investment Opportunities Today


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.

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62 thoughts on “is the Stock Market Too High? 2 Sectors that are Value Investment Opportunities Today

  1. Yes! Definitely more REITs and NAV deets. I've heard, though am curious to your thoughts, about evaluating REITs in terms of P:FFO (price to funds from operations)?

  2. Great video. Thank you. I'm curious about MLP's. They seem like an interesting investment at this point in the economic cycle.

  3. Great Video! Thanks Jimmy! How about a deep dive into the Financial sector. Also, would it be wise to use more than one process to evaluate value? Learning a lot thanks again!

  4. Thanks for another awareness raising video. It would be helpful to learn what valuation ratios are appropriate for different sectors/industries. As you mentioned PE would not be appropriate for REITs and other capital- (depreciation)-intensive industries. Also, how can individual investors take advantage of the behavior of institutional investors?

  5. I have really enjoyed your videos. I usually look for stocks near 52 week or 200 day lows. This is an interesting approach. Is this an approach you use to find the stocks you are interested in? Where is the best place to find information on sector p/e anyway?

  6. What if we calculate the average PE (of the Materials sector as example) and find out that Materials Average PE is always below the S&P 500. I mean what if the Materials sector stocks are historically cheaper than the other stocks. That could mean that there is no value in the end. I do not disagree with your approach but I think that we should additionally consider the averages of every sector individually through time.

  7. I really like this vlog on how you don't hide behind your answers, Some you tuber try to put a little sugar on the problem but not you.When it come to stocks.

  8. Thank you for your content. I will love videos about analysis of individual sectors and the top stocks of such sectors. You can work your way up from fiancials to the most overvalue. The 10 yr average is the most useful.

  9. Staying long always. I just wish I knew what I know now years ago. I'm trying to help people with new videos too. I love market history also. How do you do videos with a screen in background? I welcome a crash because I stay with my picks long as I can. Good luck

  10. Awesome video Jimmy, love the simple, straightforward format and lengths. Yes, I would love you to dive into the under valued sectors a little deeper and talk about some good opportunities within each. Case in point, in Materials you mentioned ECL (which I like) but in a under valued sector, ECL trades at 30X right now because people have plowed into it over the last year. Another example REIT's, would like to get some exposure, but as you pointed out, they are all over valued. Anything gems that are under valued right now in REIT's? Could do the same analysis with any of the sectors. Keep it up thanks.

  11. Honestly amazed by the sheer knowledge and information you are able to convey with these videos. I learn more by watching your videos than taking finance classes in college

  12. I with you brother. Both financials and materials stocks are on my long and watch list right now. I am holding Owens Corning Huntsman Olin Amperiprise OZK etf FNCL MFC and Invesco. Problem with materials stocks is that they are highly cyclical so gotta be careful with those and financials have always traded at a discount to the broad market so it might be a better comparison looking at just that sectors historical PE values

  13. This is an “excellent” video! It’s refreshing to see someone do a video with lot’s of raw data and not just ramble on about their opinion. Well done sir.

    I would really like to see a net asset video from you since I like REITs but know very little about analyzing them.

    I also like the financial sector right now and I’m watching energy closely, everything else looks a bit overpriced for me. I dove into some financial stocks a couple of weeks ago so I would certainly enjoy a video on that sector. Thanks for the great videos!

  14. Shouldn't u compare the current pe of the sectors with their 10years average pe? Dr. Shiller build a etf called CAPE which uses the cape ratio of each sector to determine such sector's valuation.

  15. Great vlog, thanks! My life has been more about real estate so a deeper dive into REITs would be greatly appreciated!

  16. Could you do sector analysis of the 3 cheapest sectors, materials financials and energy, and why theyre cheaper? maybe use the different cash flow model or others that are more normal to those industries and make more sense to value individual companies. Knowing how each sectors values companies differently could be very useful.

  17. Great video, let us tall about Bank of America, since Buffett like it so well , however, I saw their growth rate past couple years are not that good

  18. Great analysis! I too thought the market was vastly overpriced by simply looking at the shape of the chart but the point you made regarding the profit relation makes perfect sense. I suppose the only logical explanation for the steep uptrend is that the companies within the S&P have gained more market share in the past decade from companies outside it (?).

  19. did you not do any research? all the companies you named in materials are over 30x PE ratio… so are financials.

  20. Just wanted say thank you for your data driven, easy to understand, yet not dumbed down videos. I have learned a lot watching them.

  21. The fact ETFs became so popular the last 10 years, I believe is one of the factors cash is still pouring in the stock market.

  22. In terms of the PE ratios, I'd be curious about the variability here. Are PE ratios typically normally distributed and/or have there been any changes in terms of the distributions of PE ratios over time?

  23. I like your videos but you always leave me wondering you never say this sector or this stock is a good buy.

  24. Hi Jimmy! It would be interesting if you can do a video on whatever you should invest just in your 401k, IRA, etc or just in stocks, mutual funds or combination of both for the long run! Thanks for all the help though!

  25. I actually looked into this a bit more and agree with you that both financials and materials are a great place to find value. But i also think taking a look at energy could be good as well, I looked into the average P/E over a 10 year period for them and noticed that they're trading around 30% lower than the average.

  26. Hi Jimmy, great information! I would definitely be interested in seeing companies from Financial sector to build a value portfolio! Thanks 🙂

  27. Hi Jimmy As usual i enjoy your crisp clear style which is easy to understand. Noticed one of your other subscribers was interested in learning more about REITS. Do you think they are overvalued? They’ve had a good run. Will be interested in your views about them when you get around to it.

  28. Comparing PE ratio between different sectors is like comparing the price of different food. Salmon cost $10 per lb doesn't mean $5 pork is undervalued.

  29. Great video. Just started following your videos. Im curious about your Real Estate sector valuation as I've slowly started increasing my investments into that sector

  30. Very Great video. just a bunch of friendly tips which, in my opinion, would improve your videos:
    – If i were you, I'd try to swing a little less ( sometimes it seems a little bit anxious ahahah)
    – Go a little bit deeper in explanations and analysis, personally i would really love it
    By the way, you're talented, keep going. You gained a new passionate follower today!

  31. Where did you get those charts for S&P 500 P/E ratio & 10 year P/E ratio? They look completely different to what I’ve been seeing from other sources. The shriller P/E ratio or CAPE ratio paints a completely different picture of what your charts show. Are your charts inflation adjusted?

  32. Well done. Haven’t studies have said enterprise value to free cash flow is one of the best measures for judging value. Also I hear CNBC. and others worrying whether lower interest rates would hurt financials. Some concern but no active hatred of the sector yet…maybe a little early?

  33. It would be interesting to see if price to cashflow produces similar result to p/e. Would financials still be at the bottom?

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