Last week we discussed one way in which we look at the attractiveness of a company as an investment opportunity, by measuring the future sales growth (implied sales growth) a company must deliver to justify its current price relative to the revenue growth that the company has delivered historically. We use this to determine if the company has reasonable expectations and the likelihood the company will be able to meet those expectations in order to deliver a reasonable return for its investors.
When we compile this data and look at the median expectations of an entire sector or index, we can make some reasonable assumptions on the attractiveness of the index or sector as a whole. In our previous article we concluded that the S&P 500 index was slightly overvalued to fairly valued, yet plenty of attractive investment opportunities were available on an individual stock basis. Today we will analyze each sector (as defined by AFG) to determine which sectors have the lowest sales expectations relative to what they have delivered historically.
The chart below displays Implied Future Sales Growth and Historical Sales Growth for each AFG sector in the S&P500. The four sectors with the lowest delta between sales growth expectations and historical performance, or the four most undervalued sectors are listed on the left, and they are Technology, Transportation, Energy/Extraction and Healthcare.
When searching for investment opportunities or allocating across sectors, this data suggests that the four sectors with the lowest expectations relative to their historical track record should be the first place to look. We believe that these sectors are likely to meet the expectations embedded in their prices and there will be more investment opportunities for individual stocks.
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