Are Growth Stock Prices Reflecting a Cheery Consensus?

In one of his chairman's letters, Warren Buffett once stated that ...

"The future is never clear, you pay a very high price in the stock market for a cheery consensus."

I just looked at the 10 year returns of the Russell 1000 Value Index, and the Russell 1000 Growth Index.

Frightening, the cost of a cheery consensus, particularly those orienting towards the growth side of the equation.

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The difference in the current valuation metrics on the two indices are significant, scary, and points to, may I suggest, more of the same looking forward.



JW

The Confused Capitalist

More low PEs and sweet dividends

Portfolio sweetness: a well above average chance for portfolio outperformance!

With the number of articles I've written over the past while about dividends and low PE ratios, I thought I'd continue the trend.

A fairly recent report issued by RBC Dominion Securities identified a list of stocks that met a trifecta of tests for outperformance: relatively low PE ratio, relatively high dividend yield, and positive dividend growth over the past five years. The following S&P 500 companies were included in the report:

• Bank of America, BAC

• Pfizer, PFE

• KB Home, KBH

• Cincinnati Financial, CINF

• Fannie Mae, FNM

• Conoco Phillips, COP

• DR Horton, DRI

• Home Depot, HD

Note that these stocks all have a dividend yield above 1.5%, with most above 2.5%, and a PE below 20 (but most are below 13).

The report also included some Canadian TSX-listed stocks, including:

• Russel Metals, RUS

• Reitman's Canada, RET.A

• Teck Cominco, TCK.B

• National Bank, NA

• Rothmans, ROC

• Power Financial, POW

• Bank of Nova Scotia, BNS

• Encana, ECA

An investor could do a lot worse than look at these stocks as a great starting point for core holdings in a conservative stock portfolio.


JW

The Confused Capitalist

Will this high dividend, low PE stock portfolio outperform?

I have used the Globe Investor stock screen to come up with a group of TSX-listed common stocks that have both a high dividend yield, above 4% and a a relatively low PE (15 or lower). To make sure I'm not getting ones that have dubious cash-flow/earnings issues or accounting practices, I've also added a cash-flow filter, ensuring that the price/cash-flow is also 15 or lower.

Of the 1,075 common stocks that this screen picks up without any defined parameters (except for common stocks), the aforementioned screening yields some 15 securities, meaning this screen is picking up well under 2% of those common stocks. I'm going to track over the next while, so see if they outperform the broader index, the S&P/TSX60 index, which is currently at 12,044.83. We'll track the performance of this model portfolio, over time.

Here is the list of the 15 stocks, name, followed by symbol, and latest price (market close August 18, 2006):

• Amerigo Resources, ARG, $2.26
• BCE Inc., BCE, $27.48
• Circa Enterprises, CTO, $1.30
• Destiny Resource Services, DSC, $9.90
• Goodfellow Inc., GDL $26.50
• MCAP, MKP, $10.05
• Norbord, NBD, $9.09
• Pacific Northern Gas, PNG, $17.44
• Revenure Properties Company, RPC, $14.00
• Rothmans, ROC, $20.10
• Russell Metals, RUS, $27.88
• Seamark Asset Management, SM, $6.50
• Taiga Building Products, TBL, $2.03
• Viceroy Homes, VLH.A, $5.17
• Weyerhaeuser, WYL, $65.63

We'll check back in anywhere from a month or longer, to see how they're all doing ..


JW

The Confused Capitalist

Value matters: Low PE stock returns pummel market averages!

If you needed more evidence or confirmation that stock value matters, i.e. not paying too high a PE ratio for stocks, some late-breaking research confirms, once again, that "value" stocks beat up on expensive "growth" stocks.

A report recently released by RBC Dominion Securities confirmed that a portfolio of the cheapest 20% of the equity universe has, since 1980, far outpaced the rest of the market. This performance contrasts even more markedly with the most expensive 20% of the market.

Total returns for those one-fifth of companies with the lowest price-earnings ratios in the S&P500 beat the index by 3.5% annually, and trampled the 20% most expensive part of that same market by 6% annually.

In Canada, the example was even more extreme, with the S&P/TSX composite index used as the equity universe. There, the cheapest one-fifth of companies soared past the index by 5% per annum, and trashed the most expensive quintile of companies, by 15% annually.

Furthermore, this performance is remarkably consistent over time: every five year period over that time frame saw the cheaper stocks outperform, except for a single five year period (the bubble years of 1995-1999 and only within the S&P500), and even then, this was only minor and only against the most expensive quintile of stocks.

Perhaps this can form the basis for a new "enhanced ETF" product.


JW

The Confused Capitalist