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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s in the Price? A Market, Sector, and Stock Guide
Key Debate: A growth scare is gaining
momentum. So, what exactly is in the price?
Still a stock-pickers’ market
Our biggest takeaway is that valuation dispersion
remains elevated and, combined with the high level of
return correlation across stocks, supports our case for
stock picking in what looks like a range-bound market in
the near term. The market is implying an equity risk
premium of 6.7%, a level exceeded only 8% of the time
over the past five years. The market is quite pessimistic
on growth, but may not be pricing in a complete collapse
in growth. The market is bullish on consumer stocks
while appearing less enthusiastic on cyclicals and
financials. Industrials stand out in terms of how little is in
the price.
What’s in the Price? A Market, Sector, and Stock Guide
• Key Debate: A growth scare is gaining momentum. So what exactly
is in the price?
• Still a stock-pickers’ market: Our biggest takeaway is that
valuation dispersion remains elevated and, combined with the high
level of return correlation across stocks, supports our case for stock
picking in what looks like a range-bound market in the near term.
• The market is implying an equity risk premium of 6.7%: Our
residual income model indicates that implied equity risk premium is
at 6.7%. At the current long bond yield, this implies a long-term
return of 15.1%. This level of equity risk premium has been
exceeded only 8% of the time over the past five years and is a level
from which investors have made good returns even on a one-year
time frame. The last time we were at similar levels was in Feb-10.
• The market is quite pessimistic about growth: Put another way,
the market is assigning 54% of the MSCI Index value to future
growth. This is lower than the trailing five-year average and puts
equities in a positive light for long-term investors. We were last at
this level in Jun-09. Bottom line is that the market is quite pessimistic
on growth, but may not be pricing in a complete collapse in growth.
• The market is bullish on consumer stocks while appearing less
enthusiastic about cyclicals and financials: Consumer staples are
pricing in excess of 25% growth for the five years beyond F2013. In
contrast, the number is 8% for industrials and 9% for financials.
Industrials appear to stand out in terms of how little is in the price. It
is also the sector with the widest gap to the what’s in the price using
consensus numbers, implying a more constructive MS analyst view.
• Key Sector and Stock Conclusions: Our work at the stock level
shows that the market is pricing in negative EPS growth for the next
five years for 23 stocks or 19% of the stocks we analyzed
• Our Methodology: We use our growth discounter model to compute the implied
EPS growth. This model has a two-stage process. We first compute the EPS growth
that the market is discounting (g(mkt)) using the Gordon’s Growth Model. We then
compute the EPS growth that the sector or stock is discounting by using the
following identity:
PE (Sector or Stock)/PE for mkt = ((1+g(sector/stock))^5)/(1 + g(mkt)))^5)
We use the F2013 PE for both the sector/stock and the market given that we have
explicit forecasts the next two years for both MS and the consensus. Thus, the
model gives us the growth embedded in the stock or sector for the next five years.
Of course there are assumptions in this model. It assumes that the sector or stock
will grow at the market rate for year 6 onwards. It also assumes that the sector and
stock multiples converge to the market multiple beyond five years. This penalizes
growth sectors but is largely balanced out by the assumption that all sectors have a
beta of one (which flatters growth sectors).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s in the Price? A Market, Sector, and Stock Guide
Key Debate: A growth scare is gaining
momentum. So, what exactly is in the price?
Still a stock-pickers’ market
Our biggest takeaway is that valuation dispersion
remains elevated and, combined with the high level of
return correlation across stocks, supports our case for
stock picking in what looks like a range-bound market in
the near term. The market is implying an equity risk
premium of 6.7%, a level exceeded only 8% of the time
over the past five years. The market is quite pessimistic
on growth, but may not be pricing in a complete collapse
in growth. The market is bullish on consumer stocks
while appearing less enthusiastic on cyclicals and
financials. Industrials stand out in terms of how little is in
the price.
What’s in the Price? A Market, Sector, and Stock Guide
• Key Debate: A growth scare is gaining momentum. So what exactly
is in the price?
• Still a stock-pickers’ market: Our biggest takeaway is that
valuation dispersion remains elevated and, combined with the high
level of return correlation across stocks, supports our case for stock
picking in what looks like a range-bound market in the near term.
• The market is implying an equity risk premium of 6.7%: Our
residual income model indicates that implied equity risk premium is
at 6.7%. At the current long bond yield, this implies a long-term
return of 15.1%. This level of equity risk premium has been
exceeded only 8% of the time over the past five years and is a level
from which investors have made good returns even on a one-year
time frame. The last time we were at similar levels was in Feb-10.
• The market is quite pessimistic about growth: Put another way,
the market is assigning 54% of the MSCI Index value to future
growth. This is lower than the trailing five-year average and puts
equities in a positive light for long-term investors. We were last at
this level in Jun-09. Bottom line is that the market is quite pessimistic
on growth, but may not be pricing in a complete collapse in growth.
• The market is bullish on consumer stocks while appearing less
enthusiastic about cyclicals and financials: Consumer staples are
pricing in excess of 25% growth for the five years beyond F2013. In
contrast, the number is 8% for industrials and 9% for financials.
Industrials appear to stand out in terms of how little is in the price. It
is also the sector with the widest gap to the what’s in the price using
consensus numbers, implying a more constructive MS analyst view.
• Key Sector and Stock Conclusions: Our work at the stock level
shows that the market is pricing in negative EPS growth for the next
five years for 23 stocks or 19% of the stocks we analyzed
• Our Methodology: We use our growth discounter model to compute the implied
EPS growth. This model has a two-stage process. We first compute the EPS growth
that the market is discounting (g(mkt)) using the Gordon’s Growth Model. We then
compute the EPS growth that the sector or stock is discounting by using the
following identity:
PE (Sector or Stock)/PE for mkt = ((1+g(sector/stock))^5)/(1 + g(mkt)))^5)
We use the F2013 PE for both the sector/stock and the market given that we have
explicit forecasts the next two years for both MS and the consensus. Thus, the
model gives us the growth embedded in the stock or sector for the next five years.
Of course there are assumptions in this model. It assumes that the sector or stock
will grow at the market rate for year 6 onwards. It also assumes that the sector and
stock multiples converge to the market multiple beyond five years. This penalizes
growth sectors but is largely balanced out by the assumption that all sectors have a
beta of one (which flatters growth sectors).
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