How To Find The Cheapest Sectors, According to Goldman Sachs

How To Find The Cheapest Sectors, According to Goldman Sachs
Stéphane Renevier, CFA

over 1 year ago1 min

Mentioned in story

When comparing the attractiveness of different sectors, it’s arguably more important to look at whether a sector’s valuation is high or low versus its own history, rather than whether it’s high or low versus other sectors. That’s because different sectors warrant different valuations. Investors will always be willing to pay a higher premium for fast-growing, highly profitable sectors, like tech, compared to slow-growing, less profitable ones like utilities. By comparing a sector to its own history, you’re measuring apples against apples, giving you a better idea of whether the sector is cheap today or not.

Conveniently, Goldman Sachs did both. They found that while the growth investment style and the tech sectors are the most expensive areas in absolute terms, they’re not eye-wateringly expensive compared to their own history. The same holds true for the consumer staples sector. Consumer discretionary and utilities, however, are currently trading at a much higher price-to-earnings ratio than they have historically, suggesting they’re quite expensive today.

If you’re looking for value opportunities, consider the energy, materials, and financial sectors. They’re not only cheap in absolute terms, but also versus their own history.

It is worth bearing in mind that this analysis does make some implicit assumptions. It treats the past ten years of data as a relevant comparison, and the price-to-earnings ratio (using forecasted earnings for the next 12 months) as a good estimate of value. It also assumes that valuations will return to their averages as usual, and that valuations even matter for returns. But it still shows that energy, materials, financials, and value are, at the very least, worth a look deeper, as they may provide some interesting buying opportunities.



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