'Extreme' stocks: Here are the 8 priciest
Stocks are trading near "extreme" levels not seen in 15 years and approaching tech-bubble proportions, declared Bank of America on Tuesday. It's a bold warning to investors already worried they're paying too much for stocks, but who may not realize by how much.
There are now eight stocks in the Standard & Poor's 500 index, including energy companies like Range Resources (RRC), video streamer Netflix (NFLX) and online retail giant Amazon (AMZN) that are trading at a whopping 100 times or more their future expected profit, according to a USA TODAY analysis of data from S&P Global Market Intelligence. These values are based on the companies' expected earnings over the upcoming four quarters.
All told, investors are paying $17.40 for a claim to every dollar of what companies in the S&P 500 are expected to earn over the next twelve months on a median basis. That's the most investors have paid for stocks by this measure since 2001, BofA says. That ranks current stock prices in the 91st percentile historically and just 14% below the tech-bubble peak when the median value was around 20 and set investors up for a brutal bear market as prices fell back to earth.
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This analysis suggests stocks are more expensive than many investors think, says Savita Subramanian, equity strategist at BofA in a note to clients. "The market remains stretched versus history on most measures we track," she says.
Energy stocks have rallied this year. Five of the eight S&P 500 stocks with the highest valuations are in the energy sector, including Range Resources. The energy exploration and production company's shares have jumped 55% this year, pushing its P-E ratio to more than 3,600 times expected earnings. And that's as the company is expected to earn a 1 cent a share in the next 12 months, below the 4 cents a share it earned in the previous 12 months.
Shares of video-streaming service Netflix are trading for 212 times the 47 cents a share the company is expected to earn the next twelve months. Another tech giant, Amazon, also continues to be richly valued, trading for 105 times expected profit. It's shares are up 23% this year, making it the fourth most valuable company in the S&P 500.
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Just because stocks are pricey on average doesn't mean investors should bail out, Subramanian says. P-E ratios aren't a precise market timing tool. Also, not all stocks are equally expensive. The largest stocks in the S&P 500 today are trading for a median of 19 times expected earnings, which is well below the 25 times average valuation the biggest stocks had in 2001. The most valuable stock today, Apple (AAPL), trades for 14 times expected earnings. In comparison, General Electric (GE), the most valuable stock in 2001, was trading at 25 times earnings then, Subramanian says.
Investors can avoid the worst pockets by focusing on larger companies and health-care stocks, Subramanian says. Health care is the cheapest sector, as the stocks have been hurt on fears more regulation could be coming after the election. No matter how expensive stocks have become, they're still cheaper than bonds, she says. "Relative to other asset classes, the case for stocks is most compelling vs. bonds," she says.
MOST EXPENSIVE STOCKS IN S&P 500
Stocks with the highest valuations based on expected earnings
Company, Symbol, Forward P-E*, YTD stock ch. %
Range Resources, RRC, 3,623, 54.6%
Halliburton, HAL, 586, 38%
Pioneer Natural Resources, PXD, 403, 52.3%
Netflix, NFLX, 212, -13%
UDR, UDR, 145, -10%
Occidental Petroleum, OXY, 144, 9.5%
Apache, APA, 117, 41%
Amazon.com, AMZN, 105, 23.4%
Source: S&P Global Market Intelligence, USA TODAY
* Based on expected earnings the next 12 months