Judging a stock based solely on the P/E ratio is like picking a car without checking the engine.
Sure, it might look like a great deal from the outside.
But without an engine for growth, what’s it really worth?
This is the problem with what I’d like to call P/E tunnel vision.
And why today’s chart focuses on a more comprehensive valuation tool: the PEG ratio.
For the unacquainted, the PEG ratio adjusts “P/E” for “long-term earnings growth”.
Higher earnings growth relative to P/E will get you a lower PEG
Lower earnings growth relative to P/E will get you a higher PEG
So the key variable here is earnings growth.
Still with me?
Great.
Now time for a chart.
I plotted the average Forward P/E ratio vs PEG ratio by S&P 500 sector (and included the Mag7).
The average PE ratio by sector is on the left.
The average PEG ratio by sector is on the right.
The red bars are tech and the Mag7. I want you to focus on those.
All sectors ex-Financials and Real Estate are shown.
Mag7 does not include Tesla as it does not have a PEG ratio.
A quick glance at the chart on the left would suggest Tech and the Mag7 are some of the most expensive cohorts in the market.
But when factoring in future earnings growth expectations (the chart on the right) these cohorts look (relative to other sectors), far less expensive.
Last week, I asked readers what they thought about Q3 earnings and where they expect S&P 500 companies to report vs the bar that’s been set. Here are the results:
That’s all for today. Have a fantastic day and thank you, as always, for reading!