US Large Cap Value - valuation?

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ge1
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US Large Cap Value - valuation?

Post by ge1 » Sun Oct 21, 2018 11:29 am

US Large Cap Value has underperformed US Large Cap Growth very significantly over the last 5-10 years. Does anybody have data how Value stocks are currently valued compared to their own history?

When looking at the Spider S&P 500 Value ETF (SPYV) in Morningstar I can see that the Forward P/E ratio is 14.8, but I’m not a fan of using forward earnings and I don’t know what that ratio historically has been.

Thanks
Last edited by ge1 on Sun Oct 21, 2018 3:44 pm, edited 1 time in total.

Valuethinker
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Re: US Large Cap Value - valuation?

Post by Valuethinker » Sun Oct 21, 2018 11:42 am

ge1 wrote:
Sun Oct 21, 2018 11:29 am
US Large Cap Value has underperformed US Large Cap Growth very significantly over the last 5-10 years. Does anybody have data how Value stocks are currently valued compared to their own history?

When looking at the Spider S&P 500 Value ETF (SPYV) in Morningstar I can see that the Forward P/E ratio is 14.8%, but I’m not a fan of using forward earnings and I don’t know what that ratio historically has been.

Thanks
I am guessing a typo but you mean 14.8x ie 14.8 "times"? 14.8% would be an earnings yield (E/P) - Russia or Turkey might be down around that level (just over 6x).
https://www.yardeni.com/pub/yardenichartbookdaily.pdf

gives you the sector PEs but not by Value v. Growth.

Didn't find an open picture of same.

All I can suggest is surfing strategy research of value managers - Meb Farber etc.

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nedsaid
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Re: US Large Cap Value - valuation?

Post by nedsaid » Sun Oct 21, 2018 12:13 pm

I have been pounding the table for Large Value for probably three years now. Large Growth has been outperforming Large Value for a decade now and something tells me the worm will turn. But the markets stubbornly refuse to listen to me and the Large Growth trend could continue for a while. My educated guess is that the relative valuation gap between Large Growth and Large Value is probably high by historical standards but Large Value stocks are probably more richly valued compared to historical averages on an absolute basis.

The yield chasing distorted the markets, for a while the low-volatility stocks actually went from Large Value to Large Growth. Low Volatility is now in Large Core but closer to Large Value than to Large Growth. High Dividend Stocks got chased hard, those have traditionally been Value stocks, but at one point got to be a bit more expensive than the market itself. Just checked, Vanguard High Dividend Index is solidly back in the Large Value box so valuations here are much better. Rising bond yields have a lot to do with this. P/E is 14.75.
A fool and his money are good for business.

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JoMoney
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Re: US Large Cap Value - valuation?

Post by JoMoney » Sun Oct 21, 2018 1:07 pm

If you use dividend stocks as a proxy for 'value stocks', the difference in valuation multiples between a company that can reinvest intrinsically and have high-growth vs a high-dividend company should have higher valuation spreads when interest rates are lower.

Imagine a zero-coupon bond that compounds at 10% compared to a bond that paid out monthly coupons at 10%.
If interest rates went down the present value of both would adjust upward, but the zero-coupon bond would be worth even more.
The investor holding the bond paying periodic coupons has to find somewhere to re-invest those coupons, and since only lower interest rates are available it will compound slower. Whereas the zero-coupon bonds interest is compounding at the 10% rate until it matures, giving it a higher present value while interest rates remain lower.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham


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JoMoney
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Re: US Large Cap Value - valuation?

Post by JoMoney » Sun Oct 21, 2018 1:55 pm

"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

garlandwhizzer
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Re: US Large Cap Value - valuation?

Post by garlandwhizzer » Sun Oct 21, 2018 1:55 pm

Rising rates and inflation typically produce more negative impact on growth stocks than on value stocks. The thing that causes growth stocks to demand higher valuations is that you're currently paying a significant premium for higher levels of expected future growth years down the road. Inflation discounts this future profit growth in real return terms particularly over longer time frames and more so when inflation is not stable but increasing. When interest rates and inflation are quite low, typically the economy is struggling and investors are willing to pay up for growth stocks which can produce increasing future profits even if the economy is struggling and value stocks are likewise struggling to maintain profits. That was the scenario from 2009 until recently when rates and inflation started increasing and now are moving up together. The opposite it typically true when rates are increasing and inflation is increasing. In that situation which is happening now, the economy itself is growing and lifting the profit stream of beaten down value stocks which now can show growing profits. Personally I believe this is one of the multiple reasons why the LCG FAANGs have suffered recent reversals. There are other prominent reasons too but this may be part of it. I believe that there is a decent chance for value to rise from its grave and begin to outperform growth in the near future. Vanguard's growth index has beaten its value index YTD, 1YR, 3YR, 5YR, 10YR, but over the last 3 months, the value index has outperformed. Is this merely a bump in the road of growth dominance or does it portend that the future may have a new leader? I don't know but one thing I do know is that historically the value versus growth styles go through alternating periods of outperformance and underperformance. When one style (growth) has dominated for so long, the chances that a change is due are increasing.

Garland Whizzer

stlutz
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Re: US Large Cap Value - valuation?

Post by stlutz » Sun Oct 21, 2018 2:07 pm

The trailing PE for the Vanguard [Large Cap] value fund is 20.6.

https://www.etf.com/VTV

I wouldn't call that cheap. Let's keep in mind a two things:

1) Value stocks have not done poorly over the past decade. They have gone up. A lot. Just not as much as growth stocks have.

2) Historically value outperformance has been larger in down market years than up market years.

ge1
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Re: US Large Cap Value - valuation?

Post by ge1 » Sun Oct 21, 2018 3:45 pm

Valuethinker wrote:
Sun Oct 21, 2018 11:42 am
ge1 wrote:
Sun Oct 21, 2018 11:29 am
US Large Cap Value has underperformed US Large Cap Growth very significantly over the last 5-10 years. Does anybody have data how Value stocks are currently valued compared to their own history?

When looking at the Spider S&P 500 Value ETF (SPYV) in Morningstar I can see that the Forward P/E ratio is 14.8%, but I’m not a fan of using forward earnings and I don’t know what that ratio historically has been.

Thanks
I am guessing a typo but you mean 14.8x ie 14.8 "times"? 14.8% would be an earnings yield (E/P) - Russia or Turkey might be down around that level (just over 6x).
https://www.yardeni.com/pub/yardenichartbookdaily.pdf

gives you the sector PEs but not by Value v. Growth.

Didn't find an open picture of same.

All I can suggest is surfing strategy research of value managers - Meb Farber etc.
Yes, 14.8x, corrected it, thanks.

ge1
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Re: US Large Cap Value - valuation?

Post by ge1 » Sun Oct 21, 2018 5:29 pm

Thanks JoMoney, exactly what I was looking for.

I did more research as well, which supports what the table is saying, i.e. Value is more or less fairly valued, whereas Growth is most likely overvalued.

ge1
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Re: US Large Cap Value - valuation?

Post by ge1 » Sun Oct 21, 2018 5:36 pm

stlutz wrote:
Sun Oct 21, 2018 2:07 pm
The trailing PE for the Vanguard [Large Cap] value fund is 20.6.

https://www.etf.com/VTV

I wouldn't call that cheap. Let's keep in mind a two things:

1) Value stocks have not done poorly over the past decade. They have gone up. A lot. Just not as much as growth stocks have.

2) Historically value outperformance has been larger in down market years than up market years.
That P/E ratio seems high, but you are right that's what that page says.

I am specifically looking at the SPYV ETF (which I like better than VTV), and the SPDR homepage has the forward P/E ratio @ 14.50 and the trailing @ 15.45.

fennewaldaj
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Re: US Large Cap Value - valuation?

Post by fennewaldaj » Sun Oct 21, 2018 5:51 pm

ge1 wrote:
Sun Oct 21, 2018 5:36 pm
stlutz wrote:
Sun Oct 21, 2018 2:07 pm
The trailing PE for the Vanguard [Large Cap] value fund is 20.6.

https://www.etf.com/VTV

I wouldn't call that cheap. Let's keep in mind a two things:

1) Value stocks have not done poorly over the past decade. They have gone up. A lot. Just not as much as growth stocks have.

2) Historically value outperformance has been larger in down market years than up market years.
That P/E ratio seems high, but you are right that's what that page says.

I am specifically looking at the SPYV ETF (which I like better than VTV), and the SPDR homepage has the forward P/E ratio @ 14.50 and the trailing @ 15.45.
etf.com has a formula that accounts for negative earnings which I assume is why it is higher. A lot of places just assume zero.

stlutz
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Re: US Large Cap Value - valuation?

Post by stlutz » Sun Oct 21, 2018 6:25 pm

etf.com has a formula that accounts for negative earnings which I assume is why it is higher. A lot of places just assume zero.
Or they take a median or do something else like that.

From prior threads we were able to figure out that etf.com is treating the entire index as a single company--it sums up the market value of all of the companies and divides by the aggregate earnings of all of the companies. Since you're buying the entire index, the entire universe should factor into your calculation.

ge1
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Re: US Large Cap Value - valuation?

Post by ge1 » Sun Oct 21, 2018 6:32 pm

Interesting, thanks. That seems the right way to do it.

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whodidntante
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Re: US Large Cap Value - valuation?

Post by whodidntante » Sun Oct 21, 2018 6:34 pm

Pretty good visual. SCV isn't as "overbought" as some people seem to believe.

ge1
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Re: US Large Cap Value - valuation?

Post by ge1 » Sun Oct 21, 2018 7:57 pm

@ JoMoney - thanks again for sending that link. I‘m usually not a fan of Banking presentations, but that JP Morgan presentation is very well done and very informative.

columbia
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Re: US Large Cap Value - valuation?

Post by columbia » Sun Oct 21, 2018 9:24 pm

Small cap growth was the black hole...until it wasn’t.

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