Day Hagan Research Update

DAY HAGAN RESEARCH UPDATE

AN ALTERNATIVE MEASURE OF VALUATION

SUMMARY

One measure of valuation shows the S&P 500 pricing in 3.5 percent earnings growth for the next 5 years.

WRITTEN BY

Regan Teague

POSTED

September 21, 2016

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The Price-to-Earnings ratio (P/E) is one of the most popular metrics used when determining the value of a stock because of its ease to calculate and interpret.  While we find the P/E ratio to be a somewhat useful valuation tool, we view intrinsic value calculations to be more worthwhile, albeit more complex to compute.  At Day Hagan, we like to use intrinsic value calculations as a way to determine what the market is currently expecting for a stock or sector.  In the table below you can see what we deem to be the current earnings growth projections for the next 5 years for the S&P 500 along with each of the sectors within it.  We tend to find the sectors with the lowest expectations on a relative and absolute basis to be the most attractive from a valuation standpoint, because they have a low bar to overcome in order to meet the market’s expectations.

As you can see, for example, we calculate that the market is now pricing in 3.50 percent earnings growth for the S&P 500 for the next 5 years.  While this is an inexact calculation, the goal is to get an idea of what is priced in, and what would have to occur for the market to do better or worse than currently expected.  You will also note that for the past 5 years, S&P 500 earnings growth has averaged 4.11 percent, so the expectations for the next 5 years are below what has actually occurred over the past 5 years.

From a low-expectations perspective, we view Financials, Telecom, Industrials and Consumer Discretionary sectors as being “under-appreciated”.  In other words, the perceptions of these sectors are very pessimistic, even when viewed relative to their past 5 years of actual earnings growth results.

From a high-expectations perspective, we view Materials and Utilities as sectors that have a lot of optimism around them.  In other words, they have high earnings growth expectations compared to the other sectors, as well as their own earnings growth’s from the past 5 years.


Materials and Utilities Index Chart

To be clear, this is only a general exercise for us to understand another facet of market expectations and valuation.  Our intrinsic value work currently indicates that the “opportunity set” of attractive sectors and individual stocks is limited.  Within our U.S. allocation in the Tactical Global ETF strategy, we hold overweight positions in the Financial, Information Technology, Consumer Discretionary and Industrial sectors through sector and style ETFs.  We remain neutral to mildly bullish in our overall view of the global equity markets.

Have a wonderful week,

Regan Teague
Analyst
Day Hagan Asset Management
Day Hagan Investment Research

— Written 9.20.2016

Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM, accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

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