On January 9, 2018, David John Marotta appeared on Radio 1070 WINA’s Schilling Show to discuss ten investment categories that look more attractive than the S&P 500 at the start of 2018.
When you buy a stock, you own a share of that company’s earnings. Because both the earnings of the company and the price of the stock are valued in currency, it is easy to compare the two historically. This ratio is called a P/E which is short for “Price to Earnings.” A bit more complicated ratio is future P/E, which is the ratio between the price and the expected future earnings.
An attractive future P/E means the stock is on sale. An attractive future P/E means that either the price has gone down or the expected earnings has gone up.
At Marotta Wealth Management, monthly we tilt our otherwise static asset allocation based on the current future P/E compared with the historical average for that category.
Although future P/E is available any time for free, historical future P/E ratios are not as readily available. For many investment categories such information has been only available recently. However, we’ve been recording future P/Es on categories we are interested in for several years now to develop our own data bank, and we utilize the published research of some long-term studies to estimate the historical averages.
At the end of 2017, the future P/E for US Large Cap stocks was 18.65. This is slightly above the historical average of about 16.9.
While the US Markets still look attractive, here are ten categories whose valuations look even more attractive:
In Foreign Stocks:
- Emerging Markets
In U.S. Stocks:
- Mid Cap Value
- Small Cap Value
In Resource Stocks
- Foreign Real Estate
For more information on these ten categories and their future P/Es at the end of 2017, listen to the radio show.
Photo by Jens Johnsson on Unsplash