coin jar spilling over

by Kevin Kern
Managing Partner

In the Spring of 2018, the S&P 500® was trading at a forward P/E of 17.3X. The stock market was a little rich in valuation but arguably warranted as earnings were still trending upward and employment surging. At that time we took a look at our private account valuations in the piece entitled, “Being Cheap Is Good”. We compared the P/E ratios of our portfolios to the elevated P/E of the stock market. The case then and now is to avoid paying too much for the companies in your portfolio. “Trees don’t grow to the sky” so avoiding expensive stocks and ETFs is always a wise choice.

As a refresher, P/E stands for Price/Earnings. The price/earnings ratio is a measure of the current share price of a company as compared to per-share earnings (market value per share divided by earnings per share). The higher the ratio, the greater the amount that an investor is willing to pay for $1 of next year’s earnings. So a stock with a high P/E is generally expected to increase in value.

Today the S&P 500® is once again within a whisper of its all-time price high. And yes, its P/E is elevated again above 17X. Yet earnings are slowing and economic headwinds persist. We thought it would be a good time to remind clients that our portfolios will typically trade at a deeper discount to the market. This should be comforting to clients who understand that higher valuation companies can be more vulnerable to changes in interest rates or waning economic conditions.

As of September 13, 2019, the S&P 500® Index P/E ratio as represented by the EFT (SPY) was trading at 17.08X forward 12-month earnings expectations. Time will tell if this multiple is too expensive. In the meantime, the equities in our private composites are trading at a clear discount. ACM offers investors a cheaper alternative than locking into the current market multiple.

ACM Private Composite Equity 12 Month Forward P/E vs. S&P 500® Index
As represented by the SPY ETF

Index/ACM Private Strategy                                      Forward P/E

S&P 500® Index (SPY)                                                         17.08X

ACM International ADR (100% non-US Stocks)             14.74X

ACM Balanced (70% Stock, 30% Fixed)                            14.48X

ACM Income w/Growth (85% Stock, 20% Fixed)           14.28X

ACM Growth (100% Stock)                                                  14.11X

ACM Core Dividend (85% Stock, 15% Fixed)                   13.45X

Our investment philosophy is value-oriented. We are actively seeking companies that we believe are undervalued relative to the market and have good growth possibilities. Markets will react to good and bad news, resulting in price movements that many times do not correspond with a company’s long-term fundamentals. The result can be opportunities for our clients to profit by buying when prices are deflated. At each downturn, we are looking for an opportunity. But this takes patience, since it may take the market some time to realize the value inherent in these companies.

If you would like to learn why our portfolios are so cheap please give us a call.

P/E calculations as of September 13, 2019, provided by Bloomberg tracking of ACM private composite equity positions. Individual client account P/E levels will vary. Lower valuations do not eliminate volatility or guarantee positive returns. Value managers generally invest in stocks that have relatively low valuations (i.e., relatively “cheap”) and are overweight these stocks relative to a portfolio comprised of stocks that have relatively high valuations (i.e., relatively “rich”). Price-Earnings Ratio- P/E Ratio is a valuation ratio of a company’s current share price compared to its per-share earnings. Calculated as: Market Value per Share divided by Earnings per Share (EPS). *S&P 500 P/E average trailing 20 years. S&P 500 valuation represented by (SPY) ETF.

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