IVV: The S&P 500 Is Not Expensive

seekingalpha03-29

The iShares Core S&P 500 ETF replicates the S&P 500 faithfully and has identical long-term performance at a .03% fee.IVV strikes a diversified balance between growth and value and is an excellent ...

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BBuilder Summary The S&P 500 (SPX) is the benchmark that most investors utilize to gauge their performance and to measure stock selection or sector and global allocation. The SPDR® S&P 500 ETF (SPY) with US$523bn in AUM is often the market's proxy for the SPX. However, after conducting a comprehensive portfolio analysis of the iShares Core S&P 500 ETF (NYSEARCA:IVV), I found it slightly better due to lower fees (0.3% vs 0.9%) while the two replicate the SPX in complete unison. The bottom-up analysis of the ETF and by default the SP500 suggests that the market is not irrationally expensive at 20x PE or 1.5x PEG (PE to EPS Growth) and has room to run on potential Fed rate easing cycle and the eventual benefits that technology (AI) may add to productivity. Risk Profile At the expense of sounding canned, stocks have risk, it is near impossible to predict major drawdowns provoked by financial, geopolitical, and most recently a global pandemic. Nonetheless, the history of the US stock market suggests that even significant downturns are surpassed within 3 years on average. Naturally, individual companies can go bankrupt with equity values disappearing, which is why broad diversification is recommended for many investors. Performance and Index Methodology A picture speaks 1000s words, the chart below shows that the SPY and IVV have identical long-term performance and replicate the S&P 500 faithfully. The S&P 500 is selected from the top S&P1500 composite of larger cap stocks (over US$15.8bn) with US headquarters, and that have had positive earnings in the last four quarters. The index's market cap is weighted with no stock able to exceed 23% at each rebalancing theoretically allowing for a stock to reach 25% before the next rebalance. At the same time, all stocks with weights greater than 4.8% cannot be more than 50% of the Index. This means that there is plenty of room for Microsoft (MSFT), Nvidia (NVDA), or Apple (AAPL) to increase weights given that the top 10 are 34% of the index. The SPX and IVV have beaten over 50% of US large-cap funds since 2000. The Nasdaq (NDX) represented by Invesco QQQ Trust ETF (QQQ), which I analyzed recently, seems to have underperformed IVV up to 2020 when the Fed went on a massive monetary stimulus and the pandemic drove stay-at-home tech sector stocks. Today the AI phenomenon is pushing the tech-heavy sector far more than the balanced SPX index while the Dow Jones Industrial Average (DJI) which I recently covered, is even less tech-focused. IVV Performance vs Peers & Index (Created by author with data from Capital IQ) S&P Global Portfolio Price Target & Upside Potential I gathered consensus data for 70% of the IVV or 94 out of the 500 holdings. This is a statistically high and reasonable data set from which to garner performance and valuation conclusions. The SP500 index, as mentioned earlier, is well-diversified and not overly concentrated. The top 70% of AUM I analyzed breaks down to about .7% average weight and the remaining 30% is under .07% which produces little more than a rounding error in my view. The consensus price targets for 2024 point to a weighted upside potential of 5%, which does not seem overly optimistic and may require analyst valuation upgrades on earnings improvement as well as lower risk-free rates i.e. Fed easing to push higher. Stocks with over 20% upside potential are United Health Care (UNH), Adobe (ADBE), Nike (NKE), and Boeing (BA). IVV Consensus Price Targets (Created by author with data from Capital IQ) Revenue and Net Margins The consensus estimates that 70% of the ETF may produce around 9% revenue growth in the YE24-25 period which seems reasonable at approximately 2x GDP (nominal) growth. Only selected tech stocks and Eli Lilly (LLY) have estimated revenue growth rates over 20% with most related to the AI driver. Net Margins are estimated to increase from 17% to 18.7% which should boost ESP growth. The main contributors to this margin expansion, according to analysts, are LLY and NVDA. IVV Consensus Revenue & Margins (Created by author with data from Capital IQ) EPS Growth Rate The ETF and by proxy the SP500 have an estimated EPS growth rate of 13% in the YE24-25 period which is very solid in my view and can support current valuations at today’s risk-free rate or Fed Funds Rate. Note that the YE24 EPS growth rate of 19% is influenced by NVDA´s 100% growth estimates. I adjusted the EPS growth for several stocks that were either going from losses to gains or where the average was distorted by extraordinary events. The adjustments do not have a material impact on the weighted average but do smooth out valuation metrics. Several stocks stand out with exceptionally high EPS growth rates of over 40% such as Amazon (AMZN), Advanced Micro Devices (AMD), LLY, NVDA, and Uber Technologies (UBER). IVV Consensus EPS Growth (Created by author with data from Capital IQ) Valuation The IVV and by default, the S&P 500, is trading at a YE24 PE of 19.9x according to the consensus, which when compared to the YE24-25 EPS growth rate produces a relative valuation metric or PEG of 1.5x and does not seem absurdly expensive. In comparison, the SPX has traded at an average of 1.36x PEG and 16.4x PE in the last 20 years. Recall that the PEG ratio is deemed to be fair a 1x i.e., when EPS growth is the same as PE. I use a two-year average EPS growth rate to smooth out extraordinary events and provide a more realistic earnings view. As can be already imagined stock under 1x PEG is considered cheap on relative terms and includes NVDA, LLY, Amazon, Uber, and Pfizer (PFE). SPX Valuation (Created by author with data from Capital IQ)IVV Consensus Valuation (Created by author with data from Capital IQ) Conclusion  I rate IVV a BUY. The SP500 index ETF offers full replication at a rock-bottom fee and is highly suitable for long-term investors seeking a balance of value and growth. I do not find the portfolio expensive at 20x PE and 1.5x PEG. Upside potential, on consensus price targets, is currently modest a 5% and may require lower fed rates and/or higher EPS growth to drive prices higher in the medium term. Long term the SP500 is an excellent broad-based proxy for many of the best US companies.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2423103702"}