Daily Spotlight: Value Sectors Include Financial, Healthcare, IT

Summary

Each month we take a close look at an aspect of sector investing. This month, we are examining growth and valuation. Investors hunting for stocks that reasonably balance long-term growth prospects and current value characteristics might look at companies in the Financial, Information Technology, and Healthcare sectors. These are among the industry groups that are selling for (price/earnings)/(growth+yield) ratios at or below the S&P 500’s ratio of 2.2. To generate the PEGY ratios, we use the P/E ratio for each sector based on forward earnings for the numerator. For the denominator, we average the growth rates for the past five years along with two years of forward estimates, this in order to achieve a less-volatile earnings growth rate trend. We then add the current yield, to approximate total return. As an example, the current S&P 500 P/E ratio is 20, the current yield is 1.2%, and the historical growth rate is 8.0%. The formula is 20/(1.2+8.0) = 2.2. Sectors with favorable growth and valuation characteristics, in addition to the three listed above, include Energy, Materials, and Communication Services. Premium-valued sectors with low growth rates include Consumer St