By Philip van Doorn
Profit estimates for these companies have risen more quickly than their share prices
Some investors love to ride along with momentum, and the biggest question is always how long the big market moves may last. Over the past year, the U.S. stock market as a whole has gotten more expensive on a forward price-to-earnings basis. So this may be a good moment to dig a bit deeper into this commonly used valuation metric and highlight stocks that combine momentum with declining P/E ratios.
A stock's forward P/E ratio is its price divided by the consensus earnings-per-share estimate, among analysts working for brokerage firms, for that company over the next 12 months. It can be useful to see how a stock's price is moving relative to the rolling profit estimates.
Let's begin with the S&P 500 SPX. The index was up 30% for one year through Friday, excluding dividends. But its rolling 12-month weighted consensus EPS estimate among analysts polled by FactSet had increased only 10% from a year earlier. So the index's forward P/E ratio increased to 20.7 as of Friday's close, from 17.6 a year earlier. This is one reason some investors consider the U.S. stock market to be relatively expensive as a whole. Compare the index's current 20.7 forward P/E ratio with a five-year average of 19.4, a 10-year average of 18 and a 15-year average of 16.3, according to FactSet.
Among the 11 sectors of the S&P 500, only one sector has had its consensus 12-month EPS estimate increase more quickly over the past year than its weighted share price. Here are the sectors listed alphabetically, with the full index at the bottom:
Sector or index Forward P/E Forward P/E one year ago Change in share price Change in EPS estimate Communication Services 18.4 15.1 59% 30% Consumer Discretionary 26.4 25.1 34% 27% Consumer Staples 19.9 19.6 6% 5% Energy 12.2 10.1 2% -16% Financials 15.2 13.6 13% 2% Healthcare 19.3 17.0 15% 1% Industrials 20.9 19.4 20% 11% Information Technology 28.5 22.1 62% 25% Materials 20.5 17.5 7% -9% Real Estate 17.7 17.1 5% 2% Utilities 15.1 16.8 -4% 7% S&P 500 20.7 17.6 30% 10% Source: FactSet
Through Friday, forward P/E ratios had increased over the past year for all the sectors except the utilities sector. This was the only sector whose weighted price was down from a year earlier. Meanwhile, this sector's weighted rolling 12-month EPS estimate rose 7%.
Screening the S&P 500 for gainers that have earnings estimates rising more quickly than share prices
The best-known example of a hot stock with a consensus 12-month EPS estimate rising more quickly than the share price is Nvidia Corp. (NVDA). The stock was up 262% for one year though Friday, while its rolling consensus 12-month EPS estimate had risen 461% from a year earlier, according to FactSet. This caused Nvidia's forward P/E to decline to 32.4 from 50.1 during the 12-month period.
Here's a look at Nvidia's P/E movement relative to those of other semiconductor manufacturers.
Opinion: Nvidia's next mission is to make even more financial history
It turns out that among the S&P 500, there are 25 stocks that have gone up at least 15% over the past year, while their rolling consensus EPS estimates have risen more quickly. Here they are, sorted by price increases:
Company Ticker Forward P/E Forward P/E one year ago Change in share price Change in EPS estimate Nvidia Corp. NVDA 32.4 50.1 262% 461% Uber Technologies Inc. UBER 59.4 2,084.2 146% 8,515% Amazon.com Inc. AMZN 40.8 54.5 93% 158% General Electric Co. GE 33.0 38.4 89% 120% Royal Caribbean Group RCL 12.2 18.6 74% 166% Intel Corp. INTC 29.0 36.5 73% 118% Carnival Corp. CCL 14.6 69.9 51% 623% Axon Enterprise Inc. AXON 68.5 73.9 42% 53% Live Nation Entertainment Inc. LYV 49.8 69.5 35% 89% Equinix Inc. EQIX 76.8 79.9 33% 39% Progressive Corp. PGR 20.1 20.9 32% 37% Norwegian Cruise Line Holdings Ltd. NCLH 14.5 14.9 27% 32% Welltower Inc. WELL 70.7 92.1 27% 65% Xylem Inc. XYL 30.4 31.0 27% 29% Arch Capital Group Ltd. ACGL 10.8 11.7 23% 33% Allstate Corp. ALL 12.0 15.8 22% 60% Textron Inc. TXT 13.9 14.1 21% 23% FedEx Corp. FDX 11.9 12.8 21% 30% Qorvo Inc. QRVO 15.9 22.7 19% 70% Merck & Co. MRK 14.5 14.9 19% 22% Travelers Cos. TRV 11.8 12.5 19% 27% Monster Beverage Corp. MNST 31.5 32.0 19% 21% Molson Coors Beverage Co. Class B TAP 10.9 12.9 17% 39% T-Mobile US Inc. TMUS 17.2 18.7 16% 26% CarMax Inc. KMX 22.1 23.3 15% 22% Source: FactSet
As always, if you are considering an individual company for investment, you should do your own research and form your own opinion about that company's likelihood of remaining competitive over the next decade at least. One way to begin that process is to click on the tickers.
Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.
Don't miss: Want your stock picks to beat index funds? Look at companies with one key metric.
-Philip van Doorn
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03-04-24 1131ET
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