July 2023

U.S. equities were broadly higher in June with the small and mid-cap sectors of the market, on average, outpacing the largest capitalization stocks. Economic headlines for the month were mixed. Non-farm payrolls continued to show strength in May, coming in above estimates. However, the unemployment rate rose to 3.7%. Indexes measuring non-manufacturing and services segments of the economy were slightly lower for the month. Factory orders and retail sales were higher in May. Inflation rates continued to decline with the CPI rate coming in at 4.0%. Housing starts and new home sales had very strong increases and existing home sales rose slightly. The Fed left interest rates unchanged. Investors favored value and high beta stocks in June. In addition to high beta, the top performing stock selection factors were price/sales ratio, p/e based on normal eps, and peg ratio. Higher quality value stocks were less favored as debt/equity ratio, dividend yield, quality rating, and market capitalization were near the bottom of the factor performance list. Nearly all the industry groups we cover posted positive average price gains in June. Notable top performing groups were in the manufacturing sector including auto & truck manufacturing, steel, machine tools and construction & material handling. Airlines and recreation were also strong performers. Food related and retailers had relatively poor performance during the month. Confectionery, packaged food, soft drinks and meat packing were near the bottom of the list. Department stores and drug stores also had lower average price gains.

Value of the Market

The S&P 500 index was up 6.5% in June. The price advance countered by decreased interest rates caused the aggregate PVA for the index to rise for the month. Based on current earnings, expected growth, and current interest rates, the aggregate pva for the S&P 500 remains below the 1.0 fair value level. However, the aggregate price to intrinsic value is above its 10-year average level.
The S&P Midcap 400 Index rose 9.0% in June. The higher index value countered by a decline in long term interest rates caused the aggregate price to intrinsic value for the index to end higher for the month. Based on current earnings, expected growth, and current interest rates, the S&P Midcap 400 Index equals the 1.0 fairly valued PVA level. However, it remains above the average level for the PVA index of the last 10 years.
The Smallcap 600 Index advanced 8.0% in June. The price rise countered by a decrease in long term interest rates caused the aggregate price to intrinsic value for the Smallcap 600 index to end higher for the month. Based on current earnings, expected growth, and current interest rates, the S&P Smallcap 600 Index is below the 1.0 fairly valued level. However, the aggregate index PVA remains above its 10-year average level.

Ford’s price to value ratio (PVA) is computed by dividing the price of a company’s stock by the value derived from a proprietary intrinsic value model. A PVA greater than 1.00 indicates that a company is overpriced while a PVA less than 1.00 implies that a stock is trading below the level justified by its earnings, quality rating, dividends, projected growth rate, and prevailing interest rates. While looking at the PVA for an individual company can give a good indication of its value, the average PVA for the market as a whole can provide insight into current valuation levels.

Source: Ford Equity Research