This report is an abridged and free version of All Cap Index & Sectors: Price to Economic Book Value Through 3/11/22, one of our quarterly series on fundamental market and sector trends, available to Pro and higher members.
The full version of this report analyzes[1],[2] market cap, economic book value, and the trailing price-to-economic book value (PEBV) ratio for the NC 2000 and each of its sectors (last quarter’s analysis is here).
These reports leverage more reliable fundamental data[3] that overcomes flaws with legacy fundamental datasets to provide a more informed view of macro fundamentals and a new source of alpha.
NC 2000 Trailing PEBV Ratio Fell from 3/31/21 to 3/31/22
The trailing PEBV ratio for the NC 2000 fell from 1.7 in 3/31/21 to 1.3 in 3/31/22. This trailing PEBV ratio compares the NC 2000’s expected future profits (as reflected in its price) to its economic book value as of 3/11/22. At 1.3, the NC 2000’s valuation implies the profits of the NC 2000 stocks will increase 30% from 2021 levels.
See Figure 1 in the full version of our report for the chart of PEBV Ratio for the NC 2000 from December 1998 through 3/11/22.
Key Details on Select NC 2000 Sectors
Four NC 2000 sectors, Telecom Services, Financials, Basic Materials, and Consumer Non-cyclicals trade below their economic book value. The Telecom Services sector has the lowest trailing PEBV ratio among the eleven All Cap Index sectors based on prices as of 3/11/22 and financial data from 2021 10-Ks.
A trailing PEBV ratio of 0.5 means investors expect the Telecom Service sector’s profits to decline by 50% from 2021 levels. On the flip side, investors expect the Real Estate sector (trailing PEBV ratio of 3.4) to improve profits more than any other All Cap Index sector.
Below, we highlight the Basic Materials sector.
Sample Sector Analysis[4]: Basic Materials: Trailing PEBV Ratio = 0.8
Figure 1 shows the trailing PEBV ratio for the Basic Materials sector fell from 1.8 as of 3/31/21 to 0.8 as of 3/11/22. The Basic Materials sector market cap rose from $1.21 trillion as of 3/31/21 to $1.23 trillion as of 3/11/22, while its economic book value rose from $683 billion as of 3/31/21 to $1.5 trillion as of 3/11/22.
Figure 1: Basic Materials Trailing PEBV Ratio: December 1998 – 3/11/22
Sources: New Constructs, LLC and company filings.
The March 11, 2022 measurement period uses price data as of that date and incorporates the financial data from 2021 10-Ks, as this is the earliest date for which all the 2021 10-Ks for the NC 2000 constituents were available.
Figure 2 compares the trends for market cap and economic book value for the Basic Materials sector since 1998. We sum the individual NC 2000/sector constituent values for market cap and economic book value. We call this approach the “Aggregate” methodology, and it matches S&P Global’s (SPGI) methodology for these calculations.
Figure 2: Basic Materials Market Cap & Economic Book Value: December 1998 – 3/11/22
Sources: New Constructs, LLC and company filings.
The March 11, 2022 measurement period uses price data as of that date and incorporates the financial data from 2021 10-Ks, as this is the earliest date for which all the 2021 10-Ks for the NC 2000 constituents were available.
The Aggregate methodology provides a straightforward look at the entire NC 2000/sector, regardless of firm size or index weighting, and matches how S&P Global (SPGI) calculates metrics for the S&P 500.
For additional perspective, we compare the Aggregate method for trailing PEBV ratio with two other market-weighted methodologies. Each method has its pros and cons, which are detailed in the Appendix.
Figure 3 compares these three methods for calculating the Basic Materials sector’s trailing PEBV ratios.
Figure 3: Basic Materials Trailing PEBV Ratio Methodologies Compared: December 1998 – 3/11/22
Sources: New Constructs, LLC and company filings.
The March 11, 2022 measurement period uses price data as of that date and incorporates the financial data from 2021 10-Ks, as this is the earliest date for which all the 2021 10-Ks for the NC 2000 constituents were available.
This article originally published on April 6, 2022.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
Follow us on Twitter, Facebook, LinkedIn, and StockTwits for real-time alerts on all our research.
Appendix: Analyzing Trailing PEBV Ratio with Different Weighting Methodologies
We derive the metrics above by summing the individual NC 2000/sector constituent values for market cap and economic book value to calculate trailing PEBV ratio. We call this approach the “Aggregate” methodology.
The Aggregate methodology provides a straightforward look at the entire NC 2000/sector, regardless of firm size or index weighting, and matches how S&P Global (SPGI) calculates metrics for the S&P 500.
For additional perspective, we compare the Aggregate method for trailing PEBV ratio with two other market-weighted methodologies. These market-weighted methodologies add more value for ratios that do not include market values, e.g. ROIC and its drivers, but we include them here, nonetheless, for comparison:
- Market-weighted metrics – calculated by market-cap-weighting the trailing PEBV ratio for the individual companies relative to their sector or the overall NC 2000 in each period. Details:
- Company weight equals the company’s market cap divided by the market cap of the NC 2000 or its sector
- We multiply each company’s trailing PEBV ratio by its weight
- NC 2000/Sector trailing PEBV ratio equals the sum of the weighted trailing PEBV ratios for all the companies in the NC 2000/sector
- Market-weighted drivers – calculated by market-cap-weighting the market cap and economic book value for the individual companies in each sector in each period. Details:
- Company weight equals the company’s market cap divided by the market cap of the NC 2000 or its sector
- We multiply each company’s market cap and economic book value by its weight
- We sum the weighted market cap and weighted economic book value for each company in the NC 2000/each sector to determine the NC 2000 or sector’s weighted market cap and weighted economic book value
- NC 2000/Sector trailing PEBV ratio equals weighted NC 2000/sector market cap divided by weighted NC 2000/sector economic book value
Each methodology has its pros and cons, as outlined below:
Aggregate method
Pros:
- A straightforward look at the entire NC 2000/sector, regardless of company size or weighting.
- Matches how S&P Global calculates metrics for the S&P 500.
Cons:
- Vulnerable to impact of companies entering/exiting the group of companies, which could unduly affect aggregate values. Also susceptible to outliers in any one period.
Market-weighted metrics method
Pros:
- Accounts for a firm’s market cap relative to the NC 2000/sector and weights its metrics accordingly.
Cons:
- Vulnerable to outlier results from a single company disproportionately impacting the overall trailing PEBV ratio.
Market-weighted drivers method
Pros:
- Accounts for a firm’s market cap relative to the NC 2000/sector and weights its size and economic book value accordingly.
- Mitigates the disproportionate impact of outlier results from one company on the overall results.
Cons:
- More susceptible to large swings in market cap or economic book value (which can be impacted by changes in WACC) period over period, particularly from firms with a large weighting in the NC 2000/Sector.
[1] We calculate these metrics based on S&P Global’s (SPGI) methodology, which sums the individual NC 2000 constituent values for market cap and economic book value before using them to calculate the metrics. We call this the “Aggregate” methodology.
[2] Our research is based on the latest audited financial data, which is the 2021 10-K in most cases. Price data is as of 3/11/22.
[3] Three independent studies prove the superiority of our data, models, and ratings. Learn more here.
[4] The full version of this report provides analysis for all eleven sectors.