[1] Market Valuation: At P/S of 14.9, S&P 500 trading at a more expensive price compared to 2.5 for Inflation Stocks
Market ValuationInflation StocksS&P 500vs S&P 500As of 2/1/2022 Price To Sales Ratio (P/S)2.515CheaperPrice To OpInc Ratio (P/EBIT)7.222.5CheaperPrice To Earnings Ratio (PE)1124.4Cheaper
[2] Growth & Profits: Considering the valuation, the market appears to be rewarding higher growth and demonstrated profit generation ability of S&P 500 - S&P 500: better revenue growth --> 18.8% last Q (qoq), 34% last Q (yoy), 15.5% LTM, and 3.8% annually in last 3 FY - In comparison, Inflation Stocks: 6.2%, 21.9%, 11.2%, and -0.7% respectively, during the same periods - Similarly, S&P 500: greater profit generation promise --> 63.3% average margin, 6.6% average margin expansion, and 61.6% cash flow - The corresponding values for Inflation Stocks stand at 18.9%, -7.3%, and 31.6%Note: Average margin is based on average of last Q, LTM, and last 3 FY, while margin change is based on last Q margin vs 3Y average
Growth & ProfitInflation StocksS&P 500vs S&P 500 As of 2/1/2022 Revenue GrowthLast Q Growth (QoQ)6.2%18.8%Growing SlowerLast Q Growth (YoY)21.9%34%Growing SlowerLTM Growth11.2%15.5%Growing SlowerLast 3 Fiscal Year CAGR-0.7%3.8%Growing Slower ProfitabilityLast Q OpInc Margin14.2%67.7%Less ProfitableLTM OpInc Margin20.9%61.3%Less ProfitableLast 3 Fiscal Year Average21.5%61%Less ProfitableLTM FCF Margin31.6%61.6%Lower Cash Flow %
[3] Financial Risk: Then, is the market ignoring risk to S&P 500? Unlikely as there is no apparent higher risk for S&P 500 vs Inflation Stocks - S&P 500: better debt position, with debt as % of equity of 29.5% vs 56.1% for Inflation Stocks - S&P 500: more cash cushion, with cash as % of assets of 10.5% vs 3.8% for Inflation Stocks
Financial RiskInflation StocksS&P 500vs S&P 500 As of 2/1/2022Debt as % of Equity56.1%29.5%Higher Debt LoadCash as % of Assets3.8%10.5%Worse Cash Position
[4] Market Returns: S&P 500 is expensive investment, but offers higher growth and lower risk; Appears to be a reasonable choice but what about market returns? - S&P 500: higher average annualized return of 0% vs 10.1% for Inflation Stocks based on key market periods - These key market periods include, year-to-date, pre-covid to now, and 3 years prior to covid
Precovid date is taken as end of Feb 2020
Notes:
[1] Q = quarter, LTM = last twelve months, FY = fiscal years, yoy = year-on-year, qoq = quarter-on-quarter
[2] Revenue growth decision is made by giving more weightage to long-term revenue growth (3-year average) and lesser weightage to quarterly growths
[3] Margin mentioned is average of last Q, LTM, and last 3 FY; margin increase is average of increase in last Q vs LTM and increase in last Q vs 3-FY average
