Ford Equity Research’s Price to Value ratio (PVA) is computed by dividing the price of a company’s stock by the value derived from a proprietary intrinsic value model. A PVA greater than 1.00 indicates that a company is overpriced while a PVA less than 1.00 implies that a stock is trading below the level justified by its earnings, quality rating, dividends, projected growth rate, and prevailing interest rates.
While looking at the PVA for an individual company can give a good indication of its value, the average PVA for the market as a whole can provide insight into current valuation levels for the overall stock market.
Consistent with last month’s scores, the PVA scores for all three major S&P indices are below historical averages. The S&P 500 currently has a PVA score of .45 and is one full standard deviation below the long-term average. This is the same level it was back in 2013.
Meanwhile, the PVA scores for the S&P Mid Cap and Small cap indices are currently 0.56 and 0.54 respectively. This represents almost two full standard deviations below the long-term average. These are levels similar to those reached back in 2011 and 2012. Thus, illustrating that there is currently better value in owning Mid and Small cap stocks.
Value of the Market
The S&P 500 index increased 4.5% in May. The price rise countered by lower interest rates caused the aggregate PVA for the index to end higher for the month. Based on current earnings, expected growth, and current interest rates, the aggregate pva for the S&P 500 is well below the 1.0 fair value level. The aggregate price to intrinsic value is more than 1 standard deviation below its 10-year average level.The S&P Midcap 400 Index rose 7.1% in May. The higher index value countered by a decrease in long term interest rates caused the aggregate price to intrinsic value for the index to increas for the month. Based on current earnings, expected growth, and current interest rates, the S&P Midcap 400 Index is below the 1.0 fairly valued PVA level. In addition, the average PVA for the index remains nearly two standard deviations below its mean level of the last 10 years.The Smallcap 600 Index increased by 4.1% in May. The price rise countered by an decline in long term interest rates caused the aggregate price to intrinsic value for the Smallcap 600 index to end unchanged from the prior month. Based on current earnings, expected growth, and current interest rates, the S&P Smallcap 600 Index is well below the 1.0 fairly valued level. In addition, the aggregate index PVA remains nearly two standard deviations below its 10-year average level.
