Bill Nygren: We’re Excited About The Outlook For Value Stocks

Johnny HopkinsBill NygrenLeave a Comment

During his recent interview with Morningstar, Bill Nygren discusses why he’s excited about the outlook for value stocks using his metric that compares P/E ratios of the S&P 500 stocks. His metric shows that growth stocks are now very highly priced relative to cheap stocks than they have been over the past 30 years. Here’s an excerpt from the interview:

Nygren: Well, I think statistically we can, prove might be too strong a word, but at least show that growth is very highly priced relative to cheap stocks than it has been over the past 30 years.

A metric we like to look at is, if you take the S&P 500 and rank order them from highest P/E multiple down to lowest, what’s the 50th rated one, so the bottom of the first decile, and what’s the P/E on the 450th one?

So, 50 names are more expensive, 50 names are cheaper. And then, we look at the ratio of those two. Typically, your expensive stocks over the past 30 years have been about 4 times as expensive as the cheap stocks.

So, if the 50th cheapest stock had a P/E multiple of, say, 10, and the 50th most expensive had a P/E multiple of 40, you’d say that ratio is 4. Today, that ratio is between 6 and 7.

So, the spread between low P/E and high P/E is about 60% bigger than it has been on average over the past 30 years.

That’s why we’re excited about the outlook for value, and we think the price-sensitive investor is going to have a much better than normal opportunity ahead of them.

Is it the cheapest it’s ever been?

That same metric was a little bit higher after the market sold off, after the COVID pandemic had just started, and it was significantly higher at the end of the internet bubble in 2000, where expensive stocks were 10 times as expensive as the cheap names.

The expensive names back then were at about 90 times earnings, and the cheap names at about 9 times. So, yes, it’s a really attractive time to be looking at inexpensive stocks, but I think we’d be pushing it a little bit to say it’s the best ever.

You can listen to the entire discussion here:

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