Financial Industry Insights from Advisors Asset Management


AAM Viewpoint - Valuation Brief: Size, Sector, and Style

Since the 4th quarter sell off, equity markets have come back with a vengeance. The S&P 500 is up 13.11% year to date (as of 3/15/19), while the S&P 400 is up 14.39%, and S&P 600 is up 12.42%. With such a rally already on the books, I want to hone in on where we still see some value.


Based on the valuation metrics we follow, as of 3/15/2019, small and mid-capitalization companies are undervalued despite the 2019 rally, while large capitalization companies are fairly valued as a whole. Sector wise, there’s still some value to be found in large capitalization space, but investors will need to be more selective in their search.



The S&P 1500 is a Bloomberg composite of the S&P 500, 400, and 600. The table above breaks down what percentage of each sector’s firms are off at least x amount from their 52-week high. As of 3/15/19, 79% of the firms in the Energy sector are off at least -20% from their 52-week high, while over 50% of the firms in the Materials and Consumer Discretionary sectors are off at least -20% from theirs. So, there’s still a lot of room to run before valuations stretch beyond what we have already encountered.

Cyclical sectors look undervalued relative to defensive sectors based on forward Price/Earnings (P/E) ratios. Chart below shows the forward P/E ratios of cyclical sectors divided by forward P/E of defensive sectors for the past 20 years (normalized by z score). Over the past few months the ratio has fallen below zero. Meaning that cyclical sectors are cheaper relative to defensive. Last time the deviation was this low was back in October of 2013. Since then cyclicals outperformed defensive sectors by 90 basis points annually (10/31/13 – 2/28/19). Which is great, but the cyclicals were dragged down by the energy sector. Back in June of 2014 the price of oil peaked at $107.26 per barrel then fell -75% to bottom out at $26.21 per barrel in February of 2016. The price of oil per barrel is still off more than -44% from that 2014 high. If we exclude the energy sector from our basket of cyclicals, then cyclicals outperformed defensive by 275 basis points annually from 10/31/13 to 2/28/19.


Bonus Chart:
Breaking down 20-year annualized return of each sector in the S&P 500 by capital appreciation and dividend.


Key points

  • Small and mid-capitalization companies are still undervalued

  • Large capitalization companies are fairly valued as a whole

  • Over half the S&P 1500’s securities are at least -10% off their 52-week highs

  • Cyclical sectors are undervalued relative to defensive sectors, based on their forward P/E

    • We emphasize Energy and Consumer Discretionary going forward


CRN: 2019-0304-7285R



This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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