People posted valuable comments following my article and I feel it would be good to copy some over. The discussion is mainly centered on growth vs. value. My take away is that
ETF Ranking Favors XLE and Dislikes XLF for the WeekThe ETF ranking is an extension of our newly designed stock ranking system that ranks every stock based on its valuation, financial condition, and return on capital. Although the ranking system is fundamental based, it actually drives short term return. We observed that stocks with higher ranks had a strong tendency to outperform those with lower ranks over a period of one week. The data show that moving up 10 rank points translates to an extra annualized return of 1.7% in the past 10 years, if ranks range from 0 to 100.
- Chasing trailing twelve months (ttm) growth number is too late to the game
- Projected growth number may be a better choice, but it's inherently difficult to evaluate the quality and credibility of the projected number
- Hence the best way to evaluate growth is to do it on a case-by-case basis. There may not be a good formula to represent growth, and hence it's difficult to integrate it into my fundamental ranking system.
It's just my take away and it's always debatable.
Below are the comments:
By the way, don't be so sure growth and value are antagonistic. Books, etc, make it seem that way and that's understandable; it's a lot easier to sell a book if it can be easily classified per a particular style so devotees of that style can recognize it as something that would be of interest to them. Actually, though, growth and value are much more aligned than many realize.
[Y]ou may want to work with PEG (the PE to growth ratio). For PE, I suggest using price divided by estimated EPS. For growth, use the consensus estimated long-term EPS growth rate. Many say a PEG should be equal to or less than 1.00. Actually, though, that's folklore. Realistically, PEGs below 2 tend to be reasonable. Now, here's the hard part. Critically evaluate the growth projection. That's important. Value errors usually come from latching onto a not-so-credible growth forecast.If you work that way, you'll develop a strong sense of stock market value (one that is not at all antagonistic to growth).
I'm not talking about quality of growth; I'm talking about the credibility -- believability -- of the projections. A P/E of 25 on shares of a company with a projected 30% growth rate sounds great . . . unless you look more closely and decide that the 30% expectation is nonsense. The hard part is that there is no easy way to assess this; if there were, then everybody would be spot on in terms of stock valuation and there would be no opportunity for a value investor!