Saturday, January 22, 2005

Relative Valuations of Various Indexes

In the following table, I compare various stock market indexes and their P/E ratios, Earnings Growth and PEG ratios. To make the life easier, I just compare the vanguard index fund data as proxy to their respective indexes. It is always helpful to compare indexes this way to find out where the future returns may lie in the stock market. The data is as of 12/31/2004 and it is retrieved from the vanguard web-site.

Fund NameP/E RatioEarnings GrowthPEG Ratio
S&P 500 Index (VFINX)19.69.5%2.06
Total Stock Market Index (VTSMX)22.47.5%2.97
Large Growth Index (VIGRX)25.312.6%2.01
Value Index (VIVAX)16.47.6%2.16
Mid-Cap Index (VIMSX)22.112.5%1.77
Small Cap Index (NAESX)25.28.5%2.96
Small Cap Growth Index (VISGX)33.114.9%2.22
Small Cap Value Index (VISVX)20.34.0%5.06

Some Observations:

  • The first thing that catches the eye is the P/E ratio of Small Cap Growth index. At 33.1, it is way above the historical average.
  • The lowest earnings growth is in the Small Cap Value index. The PEG of 5.06 indicates that the price we pay is much higher for the amount of growth.
  • The lowest P/E honors are held by the Value index fund, which is basically a large cap value index fund for the comparison purposes. But, P/E at 16.4, it is still above the historical P/E average of the broader stock index.
  • The lowest PEG honors goes to Mid Cap index fund. The reason for this low PEG is above average earnings growth of 12.5% and a P/E of 22.1 that is below small cap stocks.
  • A blend index with P/E less than 20 is S&P 500 index.
  • The PEG of Large Growth index fund is less than the S&P 500 index fund. Are Large Growth stocks undervalued?
  • The PEG of Large Growth index is even less than the Value index fund. Are Large Growth stocks on sale?


JLP said...

This is a question rather than a comment. I was wondering how you get your charts into your blog? I haven't been able to figure that part out yet.


Moneywise said...

I know a little bit of html programming.

testtest said...

Ri-ight, and when have analysts ever been right? The strong likelihood is that your theories amount to no better than guessing.

Sure, you're using what you're given but basically you're given someone else's guess of their future earnings. Maybe you could compare the accuracy of estimates vs reality so we can see the variation?

Moneywise said...

I am just talking about the relative valuations here. The price paid for "Growth" seems lower than the price paid for "Value" side of the spectrum. This does not imply that the "Growth" is absolutely undervalued. It is relatively undervalued.