While Wall Street is busy sprinting toward Dow 25000 by the end of this year (trading at 24500 this afternoon!) Calcbench wanted to note this surprising fact: on average, a significant chunk of the S&P 500 became cheaper buys, 2014-2016.
It probably didn’t feel that way as you paid higher prices for various stocks, one year after the next. But when you examine average price-to-sales ratios over time, four of nine major industry sectors in the S&P 500 actually declined.
Here are the numbers:
We can’t provide more than a cursory explanation in this short post, but some of the patterns do make sense. For example, average P/S ratio for the energy sector rose 26 percent; that can be attributed to rising oil prices in the mid-2010s, after prices (and the industry overall) had been so awful earlier in the decade. Average P/S in the materials sector rose 48 percent; that could be explained by more optimism for the future of the sector, given rising economic fortunes in Europe and rising demand elsewhere in the world.
Or if you want to see the same data displayed more visually, this bar chart groups the information by sector:
A word on our methodology: we calculated the average P/S ratio for each sector by adding up total market cap for all companies and then total sales, and then dividing sales into price. (That is, we did not add up P/S ratio for individual companies, and then average that number.)
Astute observers might also be wondering, “Wait a minute—where’s the financial sector?” That is a fair question. We excluded the financial sector (117 firms out of the S&P 500) because price-to-sales is not a good metric for that specific business; so much of their revenue comes from investments, rather than sales, that it’s an unfair way to portray the sector. (Price-to-net income would be better.)
We will examine the financial sector and REITs (which are another special case) in the future. Meanwhile, you can now resume your usual trading exuberance, as rational or irrational as it may be.
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