If you ignore the daily warnings that the bull market in U.S. stocks is going to end, and instead look at valuations, you can see something remarkable happening: Stock prices have risen considerably, but price-to-earning valuations have fallen.
A year ago it was not uncommon for self-styled market gurus to say that large-cap U.S. stocks were trading at their highest levels to earnings since early 2004 and that stocks were therefore headed for an earth-shattering decline. But over the past year (through Aug. 31), the S&P 500 SPX, -0.21% has returned 20%, while its forward price-to-earnings ratio (based on consensus estimates for the following 12 months) has declined to 16.9 from 17.6.
If we look at year-to-date figures, the S&P 500’s forward P/E ratio has dropped from 18.3 on Dec. 31 to the current 16.9 as the index has returned 10%.
That’s called having your cake and eating it too, as U.S. economic growth accelerates and companies enjoy greater profitability (and often rising sales) in great part because of the cuts to federal income taxes signed into law by President Trump in December. Ed Yardeni listed other factors supporting rising stock prices.
Among the S&P 500, 312 companies are trading at lower forward P/E valuations than they were a year ago, according to FactSet.
• Narrowing that list of 312 companies, 74 have returned 20% or more over the past 12 months (with dividends reinvested), matching or beating the performance of the S&P 500.
• Among those 74, 48 companies have increased quarterly sales by at least 10% from a year earlier, according to their most recent earnings announcements through Aug. 31.
Among our remaining 48 companies, 34 have posted improved quarterly gross profit margins from a year earlier. A company’s gross margin is sales less the cost of goods or services sold, divided by sales. It indicates whether a company has been forced to lower its prices to defend or improve its market share. A widening margin as sales increase is a healthy sign. (This approach excludes most financial-sector companies, which we will list separately.)
Here are the remaining 34 S&P 500 companies, sorted by how much their sales have increased and showing how well their shares have performed as their forward P/E ratios have contracted:
Company Ticker Industry Increase in quarterly sales from a year earlier Gross margin - most recent reported quarter Gross margin - year-earlier quarter Total return - 12 months through Aug. 31 Forward P/E ratio Forward P/E ratio - year ago Pioneer Natural Resources Co. PXD, -2.48% Oil and Gas Production 113% 26.54% 16.47% 35% 19.7 74.4 EOG Resources Inc. EOG, -0.84% Oil and Gas Production 70% 33.08% 14.93% 40% 18.7 99.5 Concho Resources Inc. CXO, -1.63% Oil and Gas Production 67% 44.02% 21.16% 24% 27.6 83.2 Jacobs Engineering Group Inc. JEC, -0.94% Engineering and Construction 65% 18.68% 18.27% 35% 14.0 16.8 Andeavor ANDV, +1.60% Oil Refining/Marketing 59% 8.11% 4.47% 56% 14.0 15.1 Advanced Micro Devices Inc. AMD, +10.89% Semiconductors 53% 37.13% 33.54% 94% 54.3 67.4 Phillips 66 PSX, +0.14% Oil Refining/Marketing 40% 6.95% 4.10% 46% 13.5 16.2 Netflix Inc. NFLX, -0.89% Cable/Satellite TV 40% 41.39% 31.71% 110% 108.2 110.6 Micron Technology Inc. MU, -1.29% Semiconductors 40% 60.57% 46.87% 64% 4.2 5.0 Nvidia Corp. NVDA, +1.22% Semiconductors 40% 63.24% 58.39% 66% 38.8 46.8 Amazon.com Inc. AMZN, +1.42% Internet Retail 39% 42.08% 38.21% 105% 99.6 193.1 Marathon Petroleum Corp. MPC, +1.80% Oil Refining/Marketing 36% 9.43% 9.14% 61% 14.5 16.2 Occidental Petroleum Corp. OXY, -0.89% Oil and Gas Production 36% 41.19% 18.67% 40% 13.2 57.3 HollyFrontier Corp. HFC, +1.81% Oil Refining/Marketing 30% 13.15% 5.65% 144% 10.2 17.1 ConocoPhillips COP, -0.75% Oil and Gas Production 27% 30.69% 11.71% 71% 15.4 58.4 Mosaic Co. MOS, -1.68% Chemicals: Agricultural 26% 13.36% 10.96% 58% 15.4 21.5 J.B. Hunt Transport Services Inc. JBHT, -0.57% Trucking 24% 12.75% 11.69% 23% 20.2 24.5 Twitter Inc. TWTR, -0.75% Internet Software/Services 24% 67.60% 62.90% 108% 49.5 53.2 Caterpillar Inc. CAT, -0.63% Trucks/Construction/Farm Machinery 24% 31.70% 30.02% 21% 11.4 20.4 E*TRADE Financial Corp. ETFC, +0.66% Investment Banks/Brokers 23% 89.62% 89.20% 44% 16.0 18.0 Autodesk Inc. ADSK, -0.63% Software 23% 89.15% 84.07% 35% 77.7 652.9 National Oilwell Varco Inc. NOV, -1.65% Oilfield Services/Equipment 20% 16.81% 13.64% 54% 69.1 758.8 United Rentals Inc. URI, +1.49% Finance/Rental/Leasing 18% 37.81% 37.32% 32% 9.8 11.8 Seagate Technology PLC STX, -7.68% Computer Peripherals 18% 31.68% 26.97% 79% 7.8 8.5 Moody's Corp. MCO, +0.02% Financial Publishing/Services 17% 68.63% 68.25% 34% 22.2 23.7 D.R. Horton Inc. DH, +0.00% Homebuilding 17% 23.41% 21.59% 24% 9.8 12.1 Expeditors International of Washington Inc. EXPD, -0.24% Air Freight/Couriers 17% 14.20% 13.94% 32% 22.8 23.2 KLA-Tencor Corp. KLAC, +1.51% Electronic Production Equipment 14% 65.75% 64.18% 27% 12.6 13.9 Archer-Daniels-Midland Co. ADM, -0.69% Agricultural Commodities/Milling 14% 10.36% 5.80% 26% 13.9 15.1 Ametek Inc. AME, -0.52% Miscellaneous Manufacturing 14% 34.55% 34.04% 22% 22.9 23.7 T. Rowe Price Group TROW, -0.76% Investment Managers 11% 83.65% 83.01% 41% 15.2 15.6 Hilton Worldwide Holdings Inc. HLT, -0.58% Hotels/Resorts/Cruiselines 10% 23.26% 21.82% 22% 26.4 32.2 Norfolk Southern Corp. NSC, +0.33% Railroads 10% 35.40% 33.07% 47% 18.3 18.4 Analog Devices Inc. ADI, -1.24% Semiconductors 10% 61.31% 45.64% 21% 16.7 17.0 Source: FactSet Financial companies
Gross margin figures are not available for many companies in the financial-services sector. Banks and insurance companies use different ratios to measure the profitability of different aspects of their businesses. So here are the six S&P 500 stocks in the financial sector that have had total returns of at least 20% over the past year, while revenue has risen by 10% and forward price-to-earnings ratios have declined:
Company Ticker Increase in quarterly sales from a year earlier Total return - 12 months through Aug. 31 Forward P/E ratio Forward P/E ratio - year ago Progressive Corp. PGR, +1.02% 21% 48% 15.2 17.9 Northern Trust Corp. NTRS, +0.70% 20% 23% 15.7 17.7 J.P. Morgan Chase & Co. JPM, +0.38% 16% 29% 11.9 12.7 Citizens Financial Group Inc. CFG, +0.24% 13% 27% 11.3 12.7 Capital One Financial Corp. COF, +0.72% 12% 27% 9.1 9.5 Comerica Inc. CMA, +0.24% 12% 45% 13.2 14.0 Source: FactSet
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