Investors are no longer paying more for the earnings of so-called growth companies, treating the group the very same as their slower-growing value counterparts as macroeconomic uncertainties cause them to paint the whole market with the same brush.
General Electric, the largest holding in the S&P 500 Value Index Fund , has a forward price-earnings ratio of fourteen. Apple , the quintessential growth stock and largest member in the S&P 500 Growth Index Fund, sports a P-E based on forward 12-month estimates of just 15.5 right now.
“Investors are so depressed that they can’t be bothered to put a higher valuation multiple on growth stocks relative to value stocks,” wrote Ed Yardeni, president of Yardeni Research, in a note to clients today. “The growth indexes generally outperformed value in 2009 in a stunning recovery from the ashes of 2008.”
Growth stocks are trading at a forward P-E ratio of 13.2, while value stocks are trading at an 11.4 forward multiple, according to Yardeni’s figures. The value index ETF took over the performance lead at the start of 2010 as investors jumped off the hot momentum plays and sought out larger, more stable stocks for a shaky, yet maturing recovery. But since the recent confusion this quarter, perpetuated most recently by the Federal Reserve’s statement Tuesday, both indexes have closed their gap and have started to trade nearly in tandem.
“If you can buy growth for the same multiple as value, why wouldn’t you buy growth?” asks Karen Finerman, who follows a ‘value investing’ philosophy for her hedge fund, Metropolitan Capital Advisors. “But there’s also the risk that the whole market is a value trap.”
While the current earnings reporting season has been deemed a success as the majority of companies blew past second-quarter estimates, the long-term picture continues to be clouded by deflation fears and the chance of a fiscal policy mistake, investors said. Credit Suisse points out that earnings estimates for 2011 have in fact been ratcheted down by analysts.
“It’s all about the ‘E’ in the price-earnings ratio,” said Brian Kelly, founder of Kanundrum Capital and a ‘Fast Money’ trader. It doesn’t matter what kind of company you are if all earnings will suffer equally from a macroeconomic risk, said Kelly.
* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.
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Trader disclosure: On Aug 11, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova owns (AKAM), (BAX), (FCX), (MOS), (PFE), (SU), (XBI); Terranova owns (GLD) Calls; Adami owns (AGU), (BTU),. (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Finerman and Finerman’s Firm owns (BAC); Finerman and Finerman’s Firm owns (JPM); Finerman & Finerman's firm owns (RIMM); Finerman owns (AAPL); Finerman's firm owns (ARM); Finerman’s firm owns (BBY); Finerman's firm owns (LEA); Finerman’s firm owns (KFT); Finerman’s firm owns (TSX); Finerman’s firm owns (GYMB); Finerman’s firm owns (PLCE); Finerman's firm owns (WMT); Finerman's firm owns (DAN); Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman’s firm owns S&P 500 puts; Jon Najarian owns (AKAM) short calls
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