Believing The Bull: Sector ETFs with Attractive P/S Ratios

The bears have their hero in Nouriel Roubini. Yet the bulls have a star in Laszlo Birinyi, a long-time money manager who believes the cyclical bull market has just begun.

Birinyi’s belief is that the current rally may last through the presidential election of 2012. His evidence? He trusts price-to-sales more than price-to-earnings, and the P/S ratio for the S&P 500 is 1.3. That’s a 15% discount to the previous decade’s average value. Birinyi also points to every bull market since 1960 lasting more than 1000 trading days.

Okay… so what if the uber-bulls are correct? What if investors are underestimating the power of a busness-led economic recovery, in spite of consumers having a rough go of it?

Well, you might want to overweight sector ETFs that are exceptionally attractive from a P/S standpoint; that is, you might want your current P/S ratio to be below the S&P 500’s SPDR Trust (NYSE: SPY). You might want the sector to have a host of companies with P/S ratios that are below their own 5-year averages; after all, some sectors normally trade at lower P/S than other sectors. And you’d want those same companies to be logging a 20% year-over-year sales (revenue) growth.

A well-crafted screen that also incorporated market cap of at least $75 mil produced 120 stocks in the following 11 sectors:

Sectors With Attractive Price-To-Sales (P/S) Numbers And Revenue Growth
# Of Companies
Financials	35
Health Care	12
Transports	11
Technology	9
Consumer Staples	9
Consumer Discretionary	8
Utilities	8
Telecom	8
Industrials	8
Energy	7
Basic Materials	5

 

In my estimation, there appears to be a fairly normal distribution across segments… with a few possible exceptions. To the extent a Morningstar screen is providing data that we can rely on, financial companies are the sales kings (e.g., insurance, banks, brokerage, etc.). One way to overweight this in your portfolio is with the Select Financials SPDR (NYSE: XLF).

Of course, another way to look at this data is to suggest that financial stocks should not command the P/S ratios that they have in the past, and that a P/S ratio lower than the S&P 500 is warranted today. Indeed, that is a distinct possibility. Either way, financial stocks may have quite a bit of sway in market direction.

Last, but certainly not least, one could make a case that basic materials companies are overvalued; very few made it through the P/S screen, though I would not suggest that 5 companies is a world of difference from 7 or 8.

 

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can review more ETF Expert features here.