MW Why these 17 stocks in the S&P 500 are now more compelling
By Philip van Doorn
BlackRock CEO Larry Fink says companies' earnings are 'catching up' to high P/E ratios for their stocks. Here are 10 companies to keep an eye on.
There is no shortage of warnings to investors that stocks have become expensive. We are in the midst of a long bull market for stocks - if one looks past the significant pullbacks in 2022 and during the early stages of the COVID-19 pandemic in 2020. But there are hopeful signs for the years ahead, according to BlackRock Chief Executive Larry Fink.
These ideas have led to a screen of the S&P 500 SPX, below.
Tuesday's Need to Know column featured two encouraging quotes from Fink, who spoke at the Saudi Arabian sovereign wealth fund's annual Future Investment Initiative conference.
Fink said there was "$9 trillion sitting in money markets," which would help feed "an investment blossoming."
He also said that although stock prices were at "extreme" levels, corporate earnings were "catching up" to price-to-earnings valuations.
(The Need to Know column includes daily coverage of important market events, along with opinions and trading strategies from professional investors. You can sign up to have this newsletter waiting in your inbox every morning.)
Warnings about the high valuation for the S&P 500
When money managers talk about price-to-earnings valuations, they typically refer to stocks' forward P/E ratios. A stock's forward P/E ratio is its share price divided by the consensus earnings-per-share estimate for the next 12 months among analysts working for brokerage firms.
This chart shows the movement of the S&P 500's forward P/E over the past 10 years. The calculations are weighted by companies' market capitalization. The earnings estimates are rolling consensus 12-month estimates.
The S&P 500 is trading at a forward P/E of 21.8, which is 119% of its 10-year average forward P/E of 18.4, according to FactSet.
This high valuation for the index was at the heart of a warning last week from analysts at Goldman Sachs that investors were entering a "lost decade" for stock performance.
Looking back only five years, the S&P 500 rose 92% through Monday, and its total return with dividends reinvested was 107%. For 10 years, the index was up 193% and its total return with dividends reinvested was 252%.
Looking ahead, if you agree with Fink that a world awash with cash (and with interest rates declining) will enable many more years of good performance for stocks overall, it is easy to play along with the S&P 500 through any number of low-cost index funds, such as the SPDR S&P 500 ETF Trust SPY or the Vanguard S&P 500 ETF VOO.
These companies' earnings have already been 'catching up' to P/E valuations
While Fink's comments applied mainly to the years ahead, investors might want some examples of companies whose forward P/E ratios have been declining. Obviously, if a company's share price declines, its P/E will decline, all other things being equal.
So this screen is limited to companies in the S&P 500 whose share prices have risen over the past six months.
Starting with the S&P 500, there are 358 companies whose share prices rose between April 26 and Oct. 28. Among those 358, there are 61 whose forward P/E ratios declined during that period.
That's too big a list to print here, so let's narrow the group down by looking ahead. Based on weighted consensus estimates among analysts polled by FactSet, the S&P 500 is expected to increase its revenue at a compound annual growth rate of 5.7% from 2024 through 2026. For earnings per share, the index's two-year CAGR through 2026 is expected to be 13.7%.
For the 61 companies, we looked at consensus estimates for revenue and earnings per share for calendar years 2024 through 2026, with figures adjusted by FactSet for companies whose fiscal years don't match the calendar.
So here are 17 companies in the S&P 500 whose share prices have risen over the past six months while their forward P/E ratios have declined, and that are also expected to exceed the index's CAGR for revenue and EPS through 2026. The list is sorted by expected EPS CAGR.
Company Ticker Forward P/E Forward P/E six months ago Two-year estimated revenue CAGR through 2026 Two-year estimated EPS CAGR through 2026 Six-month price change though Oct. 28 Uber Technologies Inc. UBER 37.2 46.0 15.7% 69.0% 13% Eli Lilly & Co. LLY 42.4 51.4 22.4% 48.9% 22% First Solar Inc. FSLR 10.3 11.3 23.3% 47.7% 15% Advanced Micro Devices Inc. AMD 31.2 37.1 25.0% 47.3% 2% Seagate Technology Holdings PLC STX 12.4 17.9 14.9% 46.8% 18% FMC Corp. FMC 14.0 14.1 6.0% 30.2% 5% Amazon.com Inc. AMZN 33.3 39.3 10.7% 24.5% 5% Norwegian Cruise Line Holdings Ltd. NCLH 12.6 13.5 8.6% 23.7% 25% GE Aerospace GE 34.4 35.9 11.4% 20.8% 8% Dayforce Inc. DAY 31.8 34.2 13.1% 20.5% 7% Allstate Corp. ALL 10.9 11.9 10.0% 18.9% 11% PTC Inc. PTC 31.2 32.5 11.1% 18.3% 2% Zebra Technologies Corp. Class A ZBRA 24.0 24.3 7.2% 17.9% 22% Microsoft Corp. MSFT 30.7 31.1 14.1% 15.2% 5% Amphenol Corp. Class A APH 32.7 34.0 12.3% 15.0% 14% DuPont de Nemours Inc. DD 19.6 20.1 5.7% 14.6% 14% TransDigm Group Inc. TDG 33.6 36.0 9.1% 14.5% 6% Source: FactSet
Click on the tickers for more about each company, index or fund.
Read: Tomi Kilgore's guide to the wealth of information available for free on the MarketWatch quote page.
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October 29, 2024 12:29 ET (16:29 GMT)
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