The best-performing sector of the S&P 500 is still the cheapest, while technology stocks look overvalued

By Philip van Doorn

Energy stocks still appear to be bargains, despite their 2022 runup

In a year of supply challenges, investors have watched as the stock market’s sector focus has shifted.

You have seen the headlines and probably felt the effect of rising energy prices already. Has the energy sector gotten too expensive? Meanwhile, the market’s enthusiasm for technology stocks has fizzled. Or has it really?

The following tables present data for the 11 sectors of the S&P 500 . Several tables will be used to show the pattern of forward price-to-earnings valuation changes and projections for sales and earnings through 2024.

Any company’s forward P/E ratio may not be very meaningful by itself. For example, Amazon.com Inc. (AMZN) has been trading at high P/E multiples for decades, but these haven’t stopped the stock from performing well as its rapid revenue growth has continued. At the close on March 18, Amazon traded for 59.8 times the consensus earnings-per-share estimate for the next 12 months among analysts polled by FactSet, while the S&P 500 traded at a weighted forward P/E ratio of 19.4.

All price changes discussed in this article are through March 18.

Current valuations and five-year averages

Here’s a comparison of current forward P/E ratios for sectors of the S&P 500, in alphabetical order, with the index’s valuations at the bottom. The current valuations are also compared to the index’s valuation and to their own five-year averages:

S&P 500 sector          Current forward P/E  5-year average forward P/E  Current valuation to 5-year average  Current valuation to S&P 500  5-year  average valuation to S&P 500  Price change -- 2022 
Communication Services                18.27                       20.17                                  91%                           94%                                  107%               -13.1% 
Consumer Discretionary                28.74                       28.46                                 101%                          148%                                  150%               -10.8% 
Consumer Staples                      20.67                       19.71                                 105%                          106%                                  104%                -3.9% 
Energy                                11.71                        8.32                                 141%                           60%                                   44%                32.4% 
Financials                            14.23                       13.28                                 107%                           73%                                   70%                -0.5% 
Health Care                           16.56                       16.38                                 101%                           85%                                   87%                -3.1% 
Industrials                           19.98                       19.37                                 103%                          103%                                  102%                -3.1% 
Information Technology                23.83                       21.23                                 112%                          123%                                  112%               -10.9% 
Materials                             15.70                       17.47                                  90%                           81%                                   92%                -5.4% 
Real Estate                           21.43                       19.63                                 109%                          110%                                  104%                -9.3% 
Utilities                             20.17                       18.41                                 110%                          104%                                   97%                -1.7% 
S&P 500 Index                         19.44                       18.92                                 103%                                                                                    -6.4% 
Source: FactSet 

Some observations of the data in the first table:

Sales and earnings projections

Next, let’s look ahead at expected compound annual growth rates (CAGR) for revenue and earnings from 2022 through 2024. Looking past the 2021 numbers, which for some industries and sectors were still grossly affected by pandemic-related stimulus, and setting a baseline for 2022, might provide useful indicators for long-term investors.

First, here are weighted consensus sales per share estimates for the sectors from calendar 2022 through 2024, with projected two-year CAGR:

Sector                  Estimated SPS -- 2022  Estimated SPS -- 2023  Estimated SPS -- 2024  Projected two-year SPS CAGR 
Communication Services                $75.40                $81.02                $85.35                         6.4% 
Consumer Discretionary               $611.64               $677.71               $718.33                         8.4% 
Consumer Staples                     $536.56               $557.49               $580.40                         4.0% 
Energy                               $464.14               $460.92               $449.44                        -1.6% 
Financials                           $238.42               $252.86               $266.00                         5.6% 
Health Care                          $862.02               $889.09               $937.10                         4.3% 
Industrials                          $420.87               $448.66               $482.26                         7.0% 
Information Technology               $443.21               $479.56               $488.87                         5.0% 
Materials                            $265.26               $263.22               $259.50                        -1.1% 
Real Estate                           $38.02                $40.30                $42.55                         5.8% 
Utilities                            $122.65               $127.21               $131.49                         3.5% 
S&P 500 Index                      $1,705.77             $1,799.81             $1,904.66                         5.7% 
                                                                                                      Source: FactSet 

Now let’s look at earnings-per-share estimates and CAGR projections:

Sector                  Estimated EPS -- 2022  Estimated EPS -- 2023  Estimated EPS -- 2024  Projected two-year EPS CAGR 
Communication Services                $12.37                $14.21                $16.07                        14.0% 
Consumer Discretionary                $47.86                $60.15                $68.15                        19.3% 
Consumer Staples                      $36.79                $39.84                $43.09                         8.2% 
Energy                                $48.58                $45.09                $44.81                        -4.0% 
Financials                            $44.29                $50.43                $56.57                        13.0% 
Health Care                           $96.31                $95.89               $102.41                         3.1% 
Industrials                           $41.89                $50.27                $56.03                        15.7% 
Information Technology               $111.75               $124.69               $134.89                         9.9% 
Materials                             $34.61                $33.40                $34.38                        -0.3% 
Real Estate                           $13.54                $14.54                $15.37                         6.5% 
Utilities                             $17.46                $18.79                $20.23                         7.6% 
S&P 500 Index                        $225.13               $247.74               $275.00                        10.5% 
                                                                                                      Source: FactSet 

Energy ETFs worth researching

Investors looking for a bargain still appear to have one in the energy sector. A combination of low capital spending among U.S. oil and gas producers, combined with rising demand and the global supply disruption, all bode well for price support and cash flow.

You can read more about the capital spending and cash-flow prospects for the oil and gas industry here.

One way to invest in large domestic energy producers as a group is the Energy Select Sector SPDR ETF (XLE), which holds all components of the S&P 500 energy sector. Another is the iShares Global Energy ETF (IXC), which holds all the stocks in XLE, but adds large players based outside the U.S., such as TotalEnergies SE (TTE.FR) and BP PLC (BP.LN).

For investors looking for long-term growth, the communications sector’s discount and expected EPS CAGR may be appealing, but this group is varied, and you should carefully consider evolving business models and long-term prospects.

For the information technology sector, it would appear that some of the headlines in the financial media can be a bit misleading, because obvious tech-oriented names, such as Meta, Netflix and Alphabet, are actually in the communications sector. The tech sector itself remains expensive and its two-year projected sales and EPS CAGR are in the middle of the pack.

It is no surprise to see the highest expected sales and EPS CAGR rates for the consumer discretionary sector. Investors are expected to keep getting what they pay for, but the price is high.

Don’t miss: 10 highest-yielding Dividend Aristocrat stocks for uncertain times as interest rates rise and economic growth slows

-Philip van Doorn

 

(END) Dow Jones Newswires

03-21-22 0943ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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