Need some help -- What is an average?
I'm doing this study that I call The Big Boyz. It has presented some interesting observations. I'll share one of them now.
There are about 7,500 companies in the investment database that I utilize. Of these, 4,310 have a five year total return amount. It is interesting that while the Index's annualized total return is 22.2%, the average of these 4,310 companies is 11.8%. 26% of these companies actually have a negative investment performance for five years (ouch!).
The Big Boyz are defined as those companies with a market cap of $40B or more, or are included in the DJIA. The way I'm doing it there are 85 companies in this universe, of which 16 are foreign companies. The annualized five year return for these companies is 30.1%. Further, while the investment universe hit a valuation of $15T last month, the Big Boys comprise 40% of the total.
In this study, I'm running into a real problem with comparisons. Specifically, what is an average? Let me give you the PE as of the end of May for one sub-group (industrials): UTX, 20.4; GE, 33.0; IP, NM (not meaningful): and EK 274.5. Now then, what is the average PE and how is this relevant.
I do not use this example in jest. These are four components of the DJIA. Is EK adding 9 points to the DJIA PE average? What is IP doing to the DJIA average PE?
I had decided that the median PE was probably more accurate a portrayal as you quickly dispose of the out-riders. Otherwise, it seems that no comparison of the present with "historical averages" would be meaningful. But then, I ran into the same problem with the use of median on a small group. What's the median PE of the four stocks in the Industrial classification?
BTW, the median PE for The Big Boyz for the last five years (by my method of computation) is 20.4. At the end of May, the median PE was 26.2. Based on 1999 EPS mean estimates, the median PE is 19.4.
I would appreciate all input on this issue.
Now then, let me address your message. I recognize BG's definition of valuation. I believe that valuation is in the eyes of the beholder. Valuation is an art and not a science. There are many "value" investors using many methods to determine "value". In my FA scoring system, CSCO gets a zero (where 13 is a perfect score); INTC gets an "11". However, I understand how some folks perceive a "value" in CSCO, and understand how many would think me nuts for even considering an INTC. Thus, markets are created!
Thanks in advance to all on my thorny question.
Berney
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