Buying low thwarted by narrowest stock valuation gap ever

Value Stocks

Hormel Foods’s valuation climbed 33% to 20.3 times estimated earnings in the last 12 months. The multiple for the maker of Spam luncheon meat is 30% higher than the mean for the decade before the bull market, according to data on reported earnings compiled by Bloomberg.

CenterPoint Energy, which distributes power to Houston, is up 30% in 2013, boosting the price-earnings ratio to 17.2 from 14.1 in January. Before this year the utility provider traded at a 33% average discount to the S&P 500 since 1990, data compiled by Bloomberg show.

Shares of AmerisourceBergen Corp., the pharmaceutical company that pays a 24-cent dividend, advanced 61% this year. The price-earnings ratio for the Valley Forge, Pennsylvania-based company increased 53% to 18.9 in 2013, Bloomberg data show.

Stock Multiples

Those valuations are about the same as stocks with earnings more tied to economic growth. Ralph Lauren, the retailer of its namesake brand clothing, trades at 19.1 times profit projections. Citrix Systems, the Fort Lauderdale, Florida-based software maker, has a multiple of 17.6, and Monsanto Co., the world’s largest seed company, trades at 21.1 times earnings. ˜

“Investors are assigning similar values to more stocks despite very different earnings growth profiles,” Brian Belski, chief investment strategist with BMO Capital Markets, wrote in a note last month. “These trends are not likely to continue.”

The longer a rally goes on, the more valuations adjust to individual companies’ earnings, meaning stocks with lower growth whose multiples have surged this year may see them drop back down, according to Belski.

While stock prices have risen faster than S&P 500 profits, analysts expect earnings to pick up in 2014. Profits will expand 10% next year and 11% in 2015, according to Bloomberg data. Nine of 10 S&P 500 industries will post faster individual growth next year, analyst estimates compiled by Bloomberg show.

Fair Value

“The P/E is just a reflection of expectations of how much those cash flows are going to grow,” Wayne Lin, a portfolio manager at Baltimore-based Legg Mason Inc., which oversees $670 billion, said in a Nov. 13 phone interview. “Earnings can continue to grow,” he said. “This runup is just a return to fair value for equities.”

Shares of companies whose earnings depend on economic growth are still cheaper than historic averages. A group of technology stocks has a valuation of 14.6, 27% lower than the average since 1991 and a fraction of the level it reached in 2000, data compiled by Bloomberg show. Energy shares are 9.1% cheaper than the 22-year average.

The full S&P 500 trades at about 17.5 times trailing 12- month earnings, in line with the average since the end of World War II, according to S&P data. The multiple stayed low as profits almost doubled from the level in 2008 and the Fed’s accommodative policies kept stocks relatively attractive.

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