OT -
labeled as such, even though I think it is very pertinent , because it does not mention any specific stock
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/…
Looking at those P/E ratios, higher than the market cap weighted SP 500, makes me realize that not only are some sectors way overpriced for the economic outlook, but the the general market ( in this case defined as an average of sectors unweighted) is very highly priced too. That being said most Saul stocks do not have a high P/E , but few stocks are exempt from sector or general market trends .
A current P/E average of over 52!
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Looking at those P/E ratios, higher than the market cap weighted SP 500, makes me realize that not only are some sectors way overpriced for the economic outlook, but the the general market (in this case defined as an average of sectors unweighted) is very highly priced too.
Hi Mauser, I’m surprised you didn’t notice all the nonsense in those sector PE’s. The first one jumped out at me:
Advertising:
Current PE = 81
Forward PE = 21 !!!
Whoops! Something very wrong there, especially if they include 44 firms!
How about Beverages, soft:
Current PE = 93
Forward PE = 30 !!!
Or my favorite: Computer Services: 118 companies.
Current PE = 238 !!!
Forward PE = 16 !!!
Relying on PE’s like this to tell you anything would be clearly an error. How to explain them? Perhaps one company in the group had some huge GAAP losses that overwhelmed all the earnings from the other companies? And the loss will go away totally next year. With 118 Computer Services companies that’s hard to imagine. Actually it’s hard to imagine any explanation that makes any sense. But that 238 PE for 118 companies sure does skew the results out of any reality, and makes you wonder whether this is just a table compiled by a computer that doesn’t recognize when something is very wrong.
Saul
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Relying on PE’s like this to tell you anything would be clearly an error. How to explain them?
Could it be possible that their Forward P/E is 5 years forward (they did call out “expected 5 year growth”)??? That would be misleading, but it might explain why the numbers don’t make sense.
Well, even so, how do you explain 118 companies in a sector having a current average PE of 238???
I just came up with a possibility…One company had earnings of 1 cent because of some odd ball loss or charge off, and a stock price of $20, so it had a PE of 2000!!! But even that wouldn’t explain 118 companies with a PE of 238!!! Not even close.
Just a computer glitch???
Saul
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http://www.wsj.com/mdc/public/page/2_3021-peyield.html
http://money.cnn.com/data/markets/nasdaq/
Way above average P/E Especially since stock prices are down from the peak.
Russell 2000 (admittedly mostly tiny stocks) has a P/E over 108.
Probably any table covering that many companies has a computer doing most of the work.
Admittedly I did not look carefully at the link. But I was only interested in the present P/E not in comparing it to future estimated P/E. .Or any other P/E.
Because nobody successfully predicts the future. I assume any methodology for one column is about the same for all stocks.
Anyhow I did label it OT
this bull market is getting old, well into Medicare years… Anyone calling for a bear will eventually be right. But they are a lot mote likely be right sooner in an old bull.
Note my methodology does not use P/E ratio as input. For valuation I prefer Tobin Q and others. Earnings depend too much on accountants, and what do you do with companies losing money in an average? One could argue about different methodologies I just avoid it…
Perhaps it’s just an aggregate of all profits/losses?
http://discussion.fool.com/it-shows-the-computer-services-sector…
mungofitch
you can’t average P/E ratios and get a meaningful result.
(neither average across companies, nor average through time…important to remember when looking at CAPE).
If you have a single firm with $100 shares and 1 cent of earnings, you get
a PE of 10000, which will distort any average you include it in.
And of course if even one firm has zero or negative earnings, there is no defined way to calculate an average because some of the P/E ratios are undefined.
If you want a meaningful result, you need to average earnings yields (E/P), then take the inverse of the average to get a P/E.
For example, using Value Line data, the average P/E in manufacturing it’s 17.72.
That’s 1/(average(ces/pri))
e.g. http://gtr1.backtest.org/2013/?incd.v:al3000:incd.v:lt4000:t……
With not much work you can get the current level for each industry and compare it to the long run average level of that industry.
I think it is important when selecting a stock to look at the industry P/E too, because there is usually a regression to the mean as competition rises. Unfortunately sometimes it is hard to fit a company into an industry group. P/E to me is far more useful in individual companies than it is in general market indices, . But present P/E is looking in a rear view mirror using info available to everybody. Future P/E is guessing about the future. 90+ % of the time I have no special insight that would enable me to do this guessing game better than hundred of thousands of very shrewd market participants.
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I was going to post something similar to mauser. You can’t average P/Es.
Here is an easy example of a two stock sector – AB one stock has a market cap of $5, but a P/E of 100,000. AC has a market cap of $100 billion, and a P/E of 2.
Average those P/E’s and you get 50,001. But is the sector cheap or expensive – actually it is cheap, AB is expensive but is small enough to be completely disregarded, and AC is massively cheap.
Nathan
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…makes you wonder whether this is just a table compiled by a computer that doesn’t recognize when something is very wrong.
I don’t know the answer, although I suppose I could email Prof. Damodaran and ask him. Before casting too many aspersions about the data or how they were compiled, however, one might want to google “Aswath Damodaran.”
I decided to email the Prof. He replied in less than 2 minutes:
> Without taking too much of your time, may I ask:
>
> 1) Are the industry p/e ratios based on GAAP numbers? (We wonder, because some of the ratios are in the hundreds, for things like advertising and auto parts.)
Yes. I use net income from Capital IQ, which is a GAAP net income
> 2) Is the p/e for an industry calculated as a (geometric, arithmetic) mean of company p/e’s (or e/p’s), as the ratio of industry aggregated prices and earnings, some other way?
Here is what I do. I take a simple average out across PE ratios for companies in the sector. Since I don’t put caps on my PE all you need is a crazy outlier for the average to get skewed. The number that I would use from this table is the last column, where I add up the market capitalizations of all of the companies in the group and divide by the aggregated net income of all of the companies in the group. Not only is this, in affect, a weighted average PE but it also means that I don’t throw out money losing companies (a standard bias problem with averaging any multiple, bit especially so with PE).
Me: I take from this that he intends this chart to be a quick and dirty summation of industry variations, and not as anything other than that.
11 Likes
Tobin Q suffers from the fact that tangible assets are valued on the books at their purchase price. But some tangible assets (land, buildings, etc.) can have current values far greater than the purchase price.
I think that using a broad spectrum of valuation ratios is important. I like P/FCF, PEG, P/E (as long as I believe the earnings numbers), and for banks, P/B.
Tiptree, Fool One guide
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Professor Damodaran never ceases to amaze me. That table provides some valuable clues as to which industries might be fertile ground for ‘fishing’:
Industry Name Aggregate Mkt Cap/ Expected growth
Trailing Net Income Next 5 years PEG Ratio
Air Transport 7.91 20.16% 0.39
Shipbuilding & Marine 2.72 35.50% 0.08
Transportation 23.83 45.51% 0.52
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Rats. Hit the wrong key. Let me finish the formatting of the data:
**Industry Name Aggregate Mkt Cap/ Expected growth**
**Trailing Net Income Next 5 years PEG Ratio**
Air Transport 7.91 20.16% 0.39
Shipbuilding & Marine 2.72 35.50% 0.08
Transportation 23.83 45.51% 0.52
I never would have guessed that entire industries could have PEG ratios of under 1. But lo! The shipping, flying, and trucking industries seem to be unloved. But look at the growth rates!
I think we should be fishin’ for some classic Growth at a Reasonable Price stocks there.
Tiptree, Fool One guide, learnin’ all the time
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Buffett has said that there should be an 800- number for people to call when they think about buying an airline. That said, I managed to make a few dollars on LUV, and HA was a top performer in 2015. Earnings growth depends a lot on continuing low oil prices. But HA has a lock on lucrative inter-island travel and is expanding its long-haul routes. And LUV is a very well-managed airline.
Maybe pair one of these (or a half-position in each) with a position in a deeply depressed tanker stock, so that whichever way energy goes, it’s all good?