As of May 2013, the S&P 500 was trading at 14 times its projected earnings over the next 12 months (source: FactSet). During the market peaks in October 2007 and March 2000, the P/E ratio was 15.2 and 25.6. Its 10-year P/E average (May 2003 to May 2013) was 14.1.
According to Ford Equity Research in San Diego, companies that have reduced by at least 5% the number of their shares (through buybacks) over the previous year have averaged annualized returns of 14% since the beginning of 1998 (through the first part of 2013) vs. a 6.8% annual return for the S&P 500. The index used by Ford is called the Buyback Achievers Index. From its late 2006 inception through May 21, 2013, the PowerShares Buyback Achievers ETF (symbol DRB) had a total return of 35.3% vs. 16.7% for the S&P 500.
The S&P Dividend Aristocrats is an index of large companies with a history of increasing dividends each year. Since the index’s October 2011 inception (symbol SPHYDA), its total return was 35.5% (10-21-2011 to 5/20/2013) vs. a 36.2% return for the S&P 500 ETF (symbol SPY).
There is an old Wall Street saying, “Sell in May and go away.” The strategy is also known as the “Halloween indicator.” More specifically, investors who believe in this strategy should sell their equity positions at the end of April, stay in cash equivalents for six months, and then go back into stocks right after Halloween.
At the end of 2012, there were just 25 S&P 500 companies (e.g., Apple and Yahoo) without long-term debt. The total debt of U.S. corporations remains relatively low. Nonfinancial companies in the S&P 500 had a net debt-to-market capitalization rate of 16.5% at the beginning of March 2013, much lower than the 29.4% average going back to 1967 (source: Deutsche Bank).
During 2013, The Journal of Financial Economics is going to publish an article by Robert NovyMarx, a University of Rochester professor. The paper will show bargain-priced quality stocks outperformed the overall market by > four percentage points between 1963 and 2011. This gap is even greater than the gap between value and growth stocks over the same period. Moreover, this “quality bargain” approach tends to have less severe losses in market downturns and sometimes has a negative correlation to value.
On average, U.S. mutual fund investors transfer assets from stock to bond funds during winter months and do the opposite in summer. This is the exact opposite of the famous “Sell in May and go away.”
According to finance professors Fama (University of Chicago) and French (Dartmouth College), on average, value stocks have outperformed growth stocks by four percentage points per year since 1926. Historically, value stocks traded at a P/E ratio that was 54% less than growth stocks. Based on recent research from the Leuthold Group, value is now 40% cheaper.
A preferred stock is a hybrid security, a cross between a stock and a bond. It pays a dividend that is typically lower than a bond’s interest payments, but higher than the common stock’s dividend. This fixed amount has a higher corporate priority than payment of common stock dividends, but the board of directors can always decide to lower or eliminate the preferred dividend—unlike the corporate promise behind bond interest payments.
At the beginning of 2013, Amazon.com emerged as the company with the best reputation among the general U.S. public, according to a Harris Interactive survey of 14,000 randomly selected individuals. Also included in the list were Apple, Disney, and Google. Great companies tend to be overvalued; an extreme example of this is Amazon, which was trading for well over a 200 P/E in late 2012 and had a negative P/E by March 2013 (-9 cents per share).