The S&P 500 is trading for more than 20 times earnings, well above its 18.8 long-term average. But don’t confuse this with a warning sign.
Following a 26% run-up in the SPDR S&P 500 ETF Trust (SPY) this year, nine S&P 500 stocks’ P-E ratios are now over 100. Stocks like information technology firm Autodesk (ADSK), health care Mylan (MYL) and real estate player SBA Communication (SBAC) are trading for 100 times or more their adjusted earnings the past four quarter. This is according to an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
Some might tell you such high P-E ratios signal a market top. But if you’re looking at P-E ratios of a sign of overvaluation, you’re putting too much importance on an arguably “meaningless” measure.
- 1 S&P 500 Sectors Show Growth Is Worth Paying For
- 2 Autodesk: The Highest P-E S&P 500 Stock Now
- 3 Mylan Is the P-E Counterpoint
- 4 S&P 500 Companies With The P-E Ratios Of 100 Or More
S&P 500 Sectors Show Growth Is Worth Paying For
Technology continues to be among the most expensive sectors of the market. But avoiding technology stocks due to a high P-E is an even more expensive mistake.
The Technology Select Sector SPDR’s (XLK) underlying index trades for 23.8 times trailing earnings. It’s the third most expensive sector on a P-E basis right behind health care, with a 24.6 P-E, and consumer staples at 24.
But skipping technology stocks due to a high P-E would have cost you a massive gain. The Technology Select Sector SPDR is up 42% this year, easily topping the S&P 500.
On the other hand, energy stocks started the year cheap and are still cheap. The Energy Select Sector SPDR trades for just 11.6 times trailing earnings. But energy stocks are big losers this year. The Energy Select Sector SPDR is up just 4.2% this year. That’s the worst performance among the 11 sectors.
|ETF||Symbol||P-E Before Extra items||YTD % Ch. Price|
|Health Care Select Sector SPDR Fund||(XLV)||24.6||16.1%|
|Consumer Staples Select Sector SPDR Fund||(XLP)||24||23.4%|
|Technology Select Sector SPDR Fund||(XLK)||23.8||41.6% (Best)|
|Communication Services Select Sector SPDR Fund||(XLC)||19.1||27.8%|
|Consumer Discretionary Select Sector SPDR Fund||(XLY)||19||23.0%|
|Industrial Select Sector SPDR Fund||(XLI)||17||26.0%|
|Utilities Select Sector SPDR Fund||(XLU)||16.6||19.8%|
|Materials Select Sector SPDR Fund||(XLB)||15.2||18.8%|
|Real Estate Select Sector SPDR Fund||(XLRE)||13.1||24.5%|
|Energy Select Sector SPDR Fund||(XLE)||11.6||4.2% (Worst)|
|Financial Select Sector SPDR Fund||(XLF)||11.3||27.7%|
Source: S&P Global Market Intelligence
Autodesk: The Highest P-E S&P 500 Stock Now
It’s important to fully analyze stocks, not simply look at the P-E.
At first blush, Autodesk looks pricey. The computer design software sports a P-E of 264 times trailing earnings. That makes it the most expensive S&P 500 stock.
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But that only tells part of the stock’s story. Earnings per share have rocketed by 169%, 242% and 650% in the past four quarters. You’d be hard pressed to find many S&P 500 companies growing that rapidly. Analysts, too, are having trouble keeping up with the growth. Autodesk met or topped earnings estimates in nine out of the past 10 quarters.
This fiscal year, analysts expect the company to earn $2.79 a share, up 116% from fiscal 2019. And in fiscal 2021? Earnings per share is seen jumping another 59% to $4.43 a share.
Those strong fundamentals paired with a nearly 40% rise in the stock this year explains its strong 91 IBD Composite Rating. That means Autodesk outperforms 91% of all other stocks. And the stock is still within the buy range at 179.29, just above its 179.05 buy point, says MarketSmith.
Mylan Is the P-E Counterpoint
Just a high P-E isn’t the sign of a good S&P 500 stock, either. Mylan, a drugmaker, is the next most expensive stock. It carries a trailing P-E of nearly 210.
But unlike Autodesk, Mylan has a rock-bottom 21 IBD Composite Rating. Part of that low rating is due to the stock falling nearly 30% this year to 19.
But the fundamentals are weak, too. Earnings per share dropped in each of the past four quarters by up to 15% in the March quarter. And Mylan’s future isn’t looking much better. Earnings per share is expected to fall nearly 6% this year. And while Mylan’s EPS is seen rising 4% in 2020, that’s still down 2% from 2018’s levels.
Don’t let a high P-E alone scare you.
S&P 500 Companies With The P-E Ratios Of 100 Or More
|Company||Exchange:Ticker||P-E before extra items||YTD % stock price ch.||Sector||Composite Rating|
|Advanced Micro Devices||(AMD)||207.4||115.1%||Information Technology||N/A|
|SBA Communications||(SBAC)||201.1||46.2%||Real Estate||67|
|Alexandria Real Estate Equities||(ARE)||147.6||40.9%||Real Estate||58|
|IQVIA Holdings||(IQV)||121.0||27.8%||Health Care||72|
|Digital Realty Trust||(DLR)||117.4||11.3%||Real Estate||28|
Source: IBD, S&P Global Market Intelligence (P-E ratios as of 12/6/2019), MarketSmith
Follow Matt Krantz on Twitter @mattkrantz
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