Where Have the Value Stocks Gone?

When Warren Buffett purchased his first shares of GEICO back in 1951, there were no funny commercials or talking lizard mascots to entice him. It was Buffett’s limitless curiosity about the company’s then-chairman Benjamin Graham—one of Buffett’s professors at Columbia University as well as his mentor and “hero”–that led Buffett to visit Washington DC on a cold Saturday morning to visit what was then the General Employees Insurance Company.

After spending several hours with GEICO executive Lorimer “Davy” Davidson, Buffett’s interest peaked regarding the insurance industry and GEICO’s predecessor in particular. In fact, the company was one of Buffett’s earliest investments—he purchased 350 shares at a multiple of about 8 times earnings. Given the market PE at the time (around 15), that was a good deal, but a steal given the current market PE of 24.

The Buffett story is one of many around valuations and how buying stocks that trade at discounts relative to the market can lead to good long term returns, but in the current market there are not nearly as many bargains out there when looking at the market through various valuation metrics.

Since 2005, Validea has been tracking the valuations of stocks using multiple metrics – the Price-to-Earnings ratio, Price-to-Sales, Price-to-Book and Price-to-Cash Flow. Our data allows us to look at the overall market, as denoted by the “All Stocks” column below, and various segments of the market (Mega, Large and Small and Mid Caps). Using the table below you will see that across all segments of the market, things look very pricey. The first table shows the actual level of the metric (i.e. the P/E) compared to its historical average, while the second table shows the percentile ranking. For example, using the Mega Cap universe, we can see that the average TTM P/E is 22.74 compared to 16.92 historically so the current level is far above where it’s tended to be historically. The corresponding table below shows that that Mega-Cap group has only been more expensive, based on a TTM P/E, 1.8% of the time going back to 2005 and the 1.8% of the time happened just last month when Mega Caps sported a TTM P/E of 23.

In the table you’ll see valuation metrics across market cap sizes using TTM P/E, Current Year P/E based on estimated earnings, Price-to-Sales, Price-to-Book and Price-to-Cash Flow.

History shows us that both high and low valuations can persist for extended periods of time, so this data in no way indicates what the market may do in the near term. But it can be useful to keep tabs on where things are from a valuation perspective and this data provides some interesting context for that.

market metrics