What’s now priced into global equities following the COVID-19 market turmoil? See how the StarMine Intrinsic Valuation model can help investors to test market expectations, including for companies in the S&P 500 and Stoxx 600.
- StarMine Intrinsic Valuation identifies and systematically removes three forms of analyst error and bias to improve the accuracy of longer-term estimates.
- Are there any investment opportunities to be realized in the current market environment?
- StarMine uses improved earnings projections derived from forward dividend estimates to calculate fair values or intrinsic values for over 19,000 stocks worldwide.
“What’s priced in” is a question being asked a lot during the current coronavirus-driven market turmoil. How much of this current and future bad news is now fully reflected in stock prices? And is it time to start shopping for bargains?
It would be a fool’s errand to answer these questions when there is so much uncertainty facing markets. However, we can share with you a tool that can help look at current growth rates now priced in.
To do this, we turn to the StarMine Intrinsic Valuation model. StarMine has identified and systematically removed three forms of analyst error and bias to improve the accuracy of longer-term estimates.
StarMine Intrinsic Value is calculated from adjusted earnings estimates utilized to derive forward dividend projections. This measure of fair value is updated daily on over 19,000 stocks worldwide.
In this exercise, we’ll use Market Implied Growth to quantify the expectation the market holds for growth. It sets the last closing price as “fair value” then solves for the growth rate required to justify that price.
In using this, you can begin to answer: “How much growth is currently priced in?”
As Market Implied Growth can be examined at both the individual company level and in aggregate, we will take a look across the regions to see how this has been affecting valuations.
Watch: Where’s the Bottom? — The Corona Correction
Global equities sectors
The market has priced in a sharp contraction in growth expectations with negative five-year compounded annual growth rates. In other words, these are the percentage declines EPS would have to decline by each year, for the next five years, to justify the current price.
Given the recent swoon in oil prices, it’s not surprising to see energy near the top of this list..
Top 10 U.S. business sectors with the lowest market expectations for growth rates (March 25, 2020)
Top 10 European business sectors with the lowest market expectations for growth rates (March 26, 2020)
Top 10 Asia Pacific business sectors with the lowest market expectations for growth rates (March 26, 2020)
Company level valuations
At the individual company level, the results become much more extreme.
There appears to be a huge amount of pessimism priced into the expected growth rates of companies shown across the regions.
You can see that reflected in their four-week price changes, too. Sorting a large collection of stocks from low to high like this might uncover territory that brave deep-value investors may be tempted to explore.
However, this comes with a warning. Some companies in these cheap-appearing sectors may be cheap for a reason.
For example, given plummeting oil prices, some energy companies may now have negative cash flows, low interest coverage, and a large debt burden. That combination is not sustainable long-term.
It’s important to consider the balance sheet, especially during current economic conditions. Watch for an upcoming post on how to use other StarMine models and Eikon Apps to help separate true values from potential value traps.
U.S. top 15 S&P 500 companies with the lowest market expectations for growth rates
European top 15 STOXX 600 companies with the lowest market expectations for growth rates
Top 15 Asia Pacific companies with the lowest market expectations for growth rates
Global equities with high expected growth
At the other extreme, the following examples show high-expectations companies.
The challenge for analysts is to determine whether these stocks have held up better because of high quality and defensible business models and high long-term growth prospects, or if expectations remain too high.
U.S. top 15 S&P 500 companies with the highest market expectations for growth rates
European top 15 STOXX 600 companies with the highest market expectations for growth rate
Top 15 Asia Pacific companies with the highest market expectations for growth rates
Attempting stock selection in a market environment such as this one cannot possibly be easy, and the question of the appropriate level of growth can be answered only in hindsight.
However, armed with this tool and Eikon Apps, investors can at least begin to discover what’s already been priced in and have a benchmark of comparison for their own growth expectations.
Comparing market expectations
Investors can make great returns on global equities during market recoveries.
But doing so requires expectations that are different from market expectations (and ultimately closer to correct). There are few places they can go to compare their expectations to market expectations.
Watch: StarMine — the combined alpha model
The StarMine Intrinsic Valuation model and its Market Implied Growth calculations are all in one place. The model and its components are also available as a feed for quants and in our quantitative analytics platforms: QA Direct and QA Cloud.