Very interesting Morningstar column today. Snip:
Stocks with Earnings vs. No Earnings
Charles Royce of Royce & Associates said in a recent Wall Street Journal interview, "There has been a tremendous benefit [in 2003] in owning speculative stocks." I hereby declare this to be the understatement of the century.
Out of 5,999 stocks in our database, 2,496 had negative earnings last year. These 2,496 stocks gained 117%, on average. They have a trailing three-year standard deviation of 102%. (Standard deviation is a measure of volatility--the higher the standard deviation, the more volatile the stock.) By contrast, stocks with positive earnings gained 68% last year and have a standard deviation of just 44.6%.
Financial Health
Morningstar assigns Financial Health grades to all the stocks in our database (A is the best grade, and F the worst). These grades are based on interest-coverage ratios and debt levels. Here's the breakdown of 2003 stock returns by Financial Health grade:
Grade Average Return
A 55.6%
B 68.9%
C 94.9%
D 115.8%
F 110.7%
So it really does appear true that the riskier the stock, the better its return last year. This is why many of the same mutual funds and investment newsletter portfolios that were at the bottom of the performance rankings in 2002 came out near the top in 2003.
Tech Stocks vs. Nontech Stocks
I can confidently say that we're in a second bubble for technology stocks.
There are 1,150 technology stocks in our database (with technology stocks defined as those in the hardware, software, and telecom sectors). On average, these stocks gained 137% last year, with a median return of 74%. The median trailing P/E ratio of these stocks was 31.2 as of Dec. 31, and the forward P/E was 34.6. (The latter two statistics exclude stocks with no trailing earnings, or with no analyst estimates for next year's earnings, so they're skewed low.) The median price/book, price/sales, and dividend yields on these are 2.3, 2.0, and 0.2%, respectively.
Nontech stocks returned 77% on average last year, with a median return of 40%. The trailing and forward P/E ratios on these are 19.8 and 18.2, respectively. In addition to lower P/E ratios, these stocks have lower price/sales and price/book ratios and a higher average dividend yield (1.1%). They're not cheap by historical standards but probably aren't in a bubble, either.
It seems to me that 2003 closely resembled 1999--a bifurcated go-go market. There's one big difference, though: In 1999 you could find some really cheap stocks if you turned over just a few conspicuously hidden rocks. Old economy and small-cap stocks were dramatically undervalued, especially those with healthy dividend payouts, such as REITS, insurance companies, and small regional banks.
Today, that's not the case. We've already seen data showing that small-cap stocks are no longer very attractive after running up dramatically in 2003. |
