The Value Landscape Q3 2024 (13:30)

By: Dan Lysik, CFA

October 16, 2024

Highlights

Dan Lysik presents a detailed analysis of market concentration and valuations, highlighting that the top 10 stocks in the S&P 500 have grown significantly in both weight and price-to-earnings (P/E) ratios since 2016, especially after the COVID-19 pandemic. Currently, these stocks are back near record highs, and their P/E ratios exceed 30 times earnings. The speaker notes that larger companies are becoming more capital-intensive due to spending on AI infrastructure.

Dan discusses valuation spreads, emphasizing that long-duration equities (those with high price-to-sales ratios) pose growing risks, particularly for passive investors. About 20% of the S&P 500 and half of the Russell 1000 Growth index are concentrated in companies with price-to-sales ratios over 10x. He highlights that companies with such high valuations have historically underperformed over long periods, particularly if growth expectations are not met.

He compares today’s concentration levels to the 2000-2006 period, when small-cap value outperformed large-cap growth stocks by a wide margin. Dan believes the market may be setting up for a similar cycle, where small caps outperform large caps, driven by factors like underperformance, low relative valuations, and a steepening yield curve. Small caps are coming out of an earnings trough and may see faster growth in the coming years.

Dan then shifts focus to specific stock opportunities, such as Gray Television, Lincoln, Nabors, and Quad Graphics, which he believes are mispriced due to market fears or undervaluation.

Daniel Lysik, CFA is a portfolio manager for Miller Value Partners.

Miller Value Partners, LLC (“MVP”) is a registered investment adviser. More information is available at https://adviserinfo.sec.gov/firm/summary/110632

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The Russell 2000® Value Index measures the performance of the small-cap value segment of the US equity universe. The Russell 1000® Value Index measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values. The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. The Russell 1000® Growth Index measures the performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000® Growth Index measures the performance of the smallcap growth segment of the US equity universe. The S&P 1500 Value Index draws constituents from the S&P 1500 Index. Value is measured on three factors: the ratios of book value, earnings, and sales to price. The S&P 600 SmallCap Value Index tracks the value stocks in the S&P 600 SmallCap Index, identified by three factors: book value, earnings and sales to price. The S&P 1500 Pure Value Index draws constituents from the S&P 1500 Index. Value is measured on three factors: the ratios of book value, earnings, and sales to price. S&P Pure Value Indices include only those components of the parent index that exhibit strong value characteristics and weights them by value score. Price to earnings is the market price per share divided by earnings per share. Price to tangible book value measures a company’s market value relative to its hard or tangible assets. Price to sales ratio is a tool for calculating a stock’s valuation relative to other companies. It is calculated by dividing a stock’s current price by its revenue per share. Dividend yield is the ratio of a company’s annual dividend compared to its share price. Free cash flow yield is an overall return evaluation ratio of a stock, which standardizes the free cash flow per share a company is expected to earn against its market price per share. The ratio is calculated by taking the free cash flow per share divided by the share price. Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock and serves as an indicator of a company’s profitability. EPS Growth measures the rate at which a company’s earnings per share (EPS) is increasing or decreasing, expressed as a percentage. Enterprise Value to Earnings Before Income, Taxes, Depreciation, and Amortization (EV/EBITDA) is earnings before interest, taxes, depreciation and amortization and is a calculation of a company’s financial health. Enterprise value-to-sales (EV/sales) is a financial ratio that measures how much it would cost to purchase a company’s value in terms of its sales. EV/EBIT ratio compares a company’s enterprise value to its earnings before interest, and taxes, and measures the value of a company. Price to book ratio is used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.