Searching For Value In Large-Cap Stocks: Trapeze Asset Management

Searching For Value In Large-Cap Stocks by Randall Abramson, CFA, Trapeze Asset Management

U.S. Value Is Scarce

Finding compelling undervalued large-cap stocks in the U.S. is currently a tough task. With a trailing 12 month P/E ratio of 19x, the S&P 500 is hardly a bargain. Large cap U.S. stocks also appear to be expensive through the lens of our proprietary valuation model, TVMTM. The average price-to-TVMTM for the constituents that comprise the S&P 500 now stands at 116%.

Mega caps are less expensive but still close to fair value. For example, Table 1 lists the current trailing 12-month P/E ratios and P/TVMTM values for the ten highest weighted stocks in the S&P 500. As a group they are cheaper than the overall S&P 500 but still not attractive. Similarly, the Dow Jones Industrial Average currently trades right at its TVMTM value (Figure 1). In fact, since June 2013 it has meandered tightly around its TVMTM value.

Trapeze Asset Management Searching For Value Large-Cap Stocks

Trapeze Asset Management Searching For Value Large-Cap Stocks

Return Outlook Muted

With no discount to fair value, the expected return for U.S. large-caps is simply the expected future growth in fair market value. For the Dow stocks, this has been approximately 7% annualized over the last 5 years. Going forward, we expect an annual growth rate closer to GDP at 3-4%. Value Line’s expected 5 year return for the average stock sits near a multi-year low.

Waiting Patiently

The few names that do appear on our radar screen are either in sectors experiencing considerable headwinds (e.g., Energy, Materials and Financials) or have negative analyst earnings estimate revisions (e.g., McDonald’s, Owens-Illinois), which our research has shown to be the best value trap predictor.

With the return outlook muted, we are content to hold cash while we wait for new opportunities to arise. Meanwhile, we expect our current undervalued holdings to ascend to fair market value over the next 12-24 months.

Trapeze Asset Management Searching For Value Large-Cap Stocks

Trapeze Asset Management Searching For Value Large-Cap Stocks

Trapeze Asset Management Searching For Value Large-Cap Stocks




About the Author

Trapeze Asset Management
Established in 1999, Trapeze Asset Management Inc. (TAMI) provides discretionary portfolio management for institutions and high net worth individuals, primarily through separately managed accounts. We also manage a mutual fund that can be offered by advisors across Canada. We are value investors seeking long-term capital growth by investing in securities with potential for above-average appreciation, while striving to avoid permanent loss of capital. We do so using fundamental research and proprietary methodologies.