Defensives Aren't Cheap

Today’s chart was inspired by a comment Jim Lebenthal made on TCAF last week.

But first, if you haven’t listened to last week’s episode, I highly recommend you go check it out.

Josh, Michael, and Jim hashed out their thoughts on a wide span of topics including sentiment, the software apocalypse, private credit/equity, Jim’s favorite stocks, and his new book How to Ride the Subway. Oh, and there’s plenty of laughs which is always a plus.

Jim made a comment about the PEG ratio being one of his favorite metrics when assessing if a stock is cheap or expensive.

I’ve wrote about the PEG ratio on my blog before.

Here’s a refresher for the unacquainted:

The PEG ratio adjusts “P/E” for “long-term earnings growth”.

Earnings growth is assessed on a forward basis based on consensus estimates.

The point is, P/E has little value without understanding how the “E” is expected to change in the future.

Because PEG takes the forward change of the “E” into account, I think it’s a superior fundamental metric to watch than just looking at the P/E.

So in today’s chart, I took the Russell 3000 constituents with available data and plotted the median PEG ratio by sector.

I want to see where the “cheap” and “expensive” stocks are based on this metric.

Here it is, sorted by Cyclicals, Near Cyclicals, and Defensives:

Remember, a higher PEG ratio means a “higher valuation.”

As the chart shows, Health Care, Staples, and Utilities are the three most expensive sectors in the market currently.

And they all have one thing in common: they are defensive.

Check out the other end of the chart, all the way to the left. The median PEG ratio within Comm Services is 0.83, dead cheap.

You can look at this chart and say that the market is bracing for a larger selloff. And maybe that’s true.

Or you can take the glass half full approach. In that case, some of the most “growthy sectors” look to be trading at fair valuations.

You can hear more of Jim’s thoughts on last week’s episode. Link below!