The Applied Finance Group's (AFG's)Value Expectations (VE) interface is useful in understanding the embedded sales growth a company needs to achieve over the next 5 years to justify its current stock price. Measuring the spread between a company’s embedded sales growth expectation (Implied Sales Growth) and what it has historically delivered (5 year historical median) provides a basis to determine which stocks have relatively low expectations and thus are more likely to outperform.
When using the VE interface to solve for the implied sales growth for every company within the S&P500, we found that the average implied sales growth for the overall index is 4.94%. This is less than the S&P500’s 5-year median for sales growth of 12.25%, which would suggest the index is still undervalued. The chart below displays this comparison, as well as the implied sales growth vs. historical sales growth for each sector within the index.
Less than 5% implied sales growth for the companies in the S&P 500 index seems reasonable especially since economic activity fell off a cliff last year. Given the negative nominal growth in the economy overall reversion to the mean would imply much higher near term growth rates. That means that the index is still sufficiently undervalued to keep climbing a wall of worry. Where would expectations be fair? We think around 1200 just the level we were at before the panic last September.
BERK
