The Dispersion of S&P 500 Stocks Hits A Record High

Since bottoming at a low of around 0.25 at the beginning of 2015, the valuation dispersion of S&P 500 stocks has steadily risen and is now trading at the highest level since the financial crisis, according to research from Bank of America Merrill Lynch.

In a research report published at the end of last week, Bank of America’s equity and quant strategy team, present data showing that despite the fact the S&P 500 is expensive compared to its history, there are more stock selection opportunities for value investors today than at any other point since the financial crisis. Specifically, by the end of February, the S&P 500 forward P/E had fallen to 17, the lowest level since late 2016 and only 11% above its long-term average. Meanwhile, the forward P/E dispersion of S&P 500 stocks has risen to around 0.4, significantly above the long-term median of approximately 0.32. This dispersion suggests a ” wide array of opportunities to differentiate between cheap and expensive stocks” as the report sums up.

AhiruR / Pixabay

The difference between the valuation of various sectors in the index is quite significant. Based on data between 1986 and the end of February 2018, the most expensive sector on a forward P/E basis relative to its historical average is the Diversified Financial Services sector, closely followed by the Internet and Direct Marketing retail sector. Diversified Financial Services is trading at a relative forward P/E of 1.33 compared to its historical average of 0.8 implying a mean reversion downside of 40%.

Meanwhile, the Internet and Direct Marketing retail sector is trading at a relative forward P/E of 5.2, compared to its long-term average of 3.1, implying a mean reversion downside of 41%. The cheapest sectors appear to be Automobiles and Airlines. However, within the Consumer Discretionary industry as a whole, 9 out of 12 sectors are trading at a discount to their long-term average valuation on a forward P/E basis. The most undervalued is Automobiles followed by Media and then Diversified Consumer Services.

The cheapest industry on a forward P/E basis is Telecommunication Services followed by Healthcare, both of which are trading at a discount to long-term average valuations. The most expensive industry by far is Consumer Discretionary, although as noted above, some sectors are significantly cheaper than others on a historical basis.


Saved Articles

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted & limited time offer for being a sophisticated and loyal reader.

ValueWalkPremium is a website and newsletter on the latest industry news much of which is not in the public domain and obtained via our sources.

We also have 10 years of resources on how to use this information to better your investment process.

Sign up for  today and get our exclusive content for 40% off. This is our second biggest discount ever!!

Use coupon code VIP20 or click on the button below

Limited time offer only ENDS 2/29/2019 or after next 25 subscribers take advantage whichever comes first – please do not share this discount with others