No. of Recommendations: 37
In a followup to my 'FAANMG valuation update' (post# 577625), I've taken a look at
the DJIA and compared it's 2019 year-end index price vs the total 2019 revenue and net
income of all 30 component companies, and then compared these values to historical year-end
values going back to 2005. I would have preferred to use the S&P 500, but it would have been
too time consuming. A link to a spreadsheet containing the data can be found below.

(CUMULATIVE GROWTH
DJIA @ DJIA TOTAL DJIA TOTAL YEAR END VS 2005 YEAR END)
YEAR YEAR END ANNUAL REV($M) ANNUAL NET INC($M) INDEX REVENUE NET INC REV/PRICE NET INC/PRICE
2019 26,379.55 $ 3,152,434 $ 292,231 150% 35% 34% $ 119,503 $ 11,078
2018 25,046.86 $ 3,118,527 $ 278,098 137% 34% 28% $ 124,508 $ 11,103
2017 21,750.20 $ 2,836,997 $ 243,452 106% 22% 12% $ 130,435 $ 11,193
2016 17,927.11 $ 2,687,754 $ 229,006 70% 15% 5% $ 149,927 $ 12,774
2015 17,587.03 $ 2,746,399 $ 228,065 67% 18% 5% $ 156,160 $ 12,968
2014 16,777.69 $ 2,866,604 $ 294,716 59% 23% 35% $ 170,858 $ 17,566
2013 15,009.52 $ 2,865,984 $ 312,602 42% 23% 44% $ 190,944 $ 20,827
2012 12,966.44 $ 3,088,124 $ 269,891 23% 33% 24% $ 238,163 $ 20,815
2011 11,957.57 $ 2,985,238 $ 277,740 13% 28% 28% $ 249,653 $ 23,227
2010 10,668.58 $ 2,749,474 $ 257,673 1% 18% 18% $ 257,717 $ 24,153
2009 8,885.65 $ 2,564,382 $ 204,947 -16% 10% -6% $ 288,598 $ 23,065
2008 11,244.06 $ 3,034,009 $ 165,214 7% 30% -24% $ 269,832 $ 14,693
2007 13,178.26 $ 2,719,856 $ 205,023 25% 17% -6% $ 206,390 $ 15,558
2006 11,409.78 $ 2,495,602 $ 264,806 8% 7% 22% $ 218,725 $ 23,209
2005 10,546.66 $ 2,328,098 $ 217,537 $ 220,743 $ 20,626



Below are the data points that I find most remarkable.

Between year-end 2005 and 2019, the DJIA index price has risen 150%. Over the same 14 year
period, the total growth in annual revenue and annual net income for all DJIA companies has
only risen 35% and 34% respectively. Total price growth has exceeded total annual revenue
and net income growth at more than a 4-to-1 rate.

The DJIA index closed year 2012 at 12,966. That year, it's component companies generated
$3.088 trillion dollars in total revenue. The DJIA index closed year 2019 at 26,379. In 2019,
it's component companies generated $3.152 trillion in annual revenue. 7 years later, and
DJIA annual revenue has only increased 2% TOTAL, meanwhile the index is up 103% over the
same period! And before you ask, yes, this includes adjustments for all companies that have
entered and have been booted from the index.

And finally, perhaps the most interesting statistic. At year-end 2005, 1 DJIA index point
was worth $220,743 in total component companies annual revenue. At year-end 2019, that same 1
DJIA index point was only worth $119,503 in annual revenue. Some may respond that revenue isn't
as important today as it was in 2005 - companies are leaner, meaner, and technology has
ensured that more and more revenue falls down to the bottom net income line. Right? Wrong, at
least in the case of DJIA component companies.

At year-end 2005, 1 DJIA index point was worth $20,626 in total component companies annual
net income. At year-end 2019, that same 1 DJIA index point was only worth $11,078 in annual
net income. This dwindling net income secret has been muddied by the buyback bonanza that
US corporations have been on for the last decade.

So does any of it matter? I would say it most certainly does. If DJIA price-to-revenue and
price-to-net income ratios were ever to revert back to 2005 levels, we would be looking at a
DJIA index price somewhere around 14,280 compared to today's nearly 30,000. Also keep
in mind that 2005 wasn't exactly a period of cheap valuation for stocks, so even that 14,280
number might be too optimistic.

More than anything, I think these data show what many of us believe: the relentless rise in
US stock markets in recent years (far outpacing global peer markets), has had very little to
do with the "greatest economy in the history of the US", and much more to do with
valuation-expansion as investors are forced out of fixed income and into stocks due to lack
of reasonable yield in sovereign debt markets, backed by an ever-obliging Federal Reserve.

Does that mean everyone should run out and sell stocks? No, but I do think we all need to be
aware of the environment we are operating in, be aware of the narratives we are being sold by
CNBC and politicians, and act cautiously. History shows that at today's levels, it's not about
how much money you can make, but rather how much money you can afford to lose. Just my opinion.


Link to compiled financial data and calculations:

https://docs.google.com/spreadsheets/d/1ub8QA2NEp7d-MNuJQMd1...
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Nice work Steve. I'm also worried about valuations as well, but I fear that TINA is my main problem right now - There Is No Alternative. I'm not about to go bonds. I'm not sure how much further up things go before we get that next crash. Etc. About the only thing I think I can get behind at the moment is a move more towards large value and away from small/mid growth.

This is the big reason why I'm watching this virus and what impact it might have economically. It could be the trigger.
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StevesStox, I wish there was a "super-rec" because your post is worth 10 of most rec'd posts. Good work.
Thanks,
Wendy
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Nice work.

Having been investing using the Saul method, I see things a little differently.

You pay more for growth. Take Amazon. I don’t own it because it is only growing its revenue at about 30 percent year over year.

As the indexes get filled with these types of companies, you will see much higher prices for revenue.

Here is an example, not necessarily a good one. Telsa vs Ford. Tesla has a crazy high multiple when looked at by market cap to revenue, but Ford looks light it is a Blue Light Special. The difference is growth in revenue.

The problem with looking back, even just ten years is that the indexes are not made up of the same companies, or of even the same type of companies.

Even the companies are not the same. This list includes all types if companies, not just the ones that are growing revenue or for that matter are in the SP 500.

AT&T is now an entertainment company with a telecommunication branch. (Declining revenues)

Amazon is now a Cloud Services company with a retail branch

Netflix is now content creator with a little movie curation.

Tesla is becoming a power storage company with an automobile component.

Dell is a Cloud systems provider with computer retail sales division.

All of these companies are transformed. As the ones that can grow; grow, the ones that stagnate either have less of an influence on the index that they are in, or in the case of AT&T get dropped.

I own too much Data Dog and I will sell some soon. I will sell all of it if its growth rate fell to 70 percent.

This is one reason you are seeing higher multiples on the indexes. Some companies, like AT&T and Ford are selling at decent discount. But who wants a value trap?

Cheers
Qazulight
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"...More than anything, I think these data show what many of us believe: the relentless rise in US stock markets in recent years (far outpacing global peer markets), has had very little to do with the "greatest economy in the history of the US", and much more to do with valuation-expansion as investors are forced out of fixed income and into stocks due to lack of reasonable yield in sovereign debt markets, backed by an ever-obliging Federal Reserve..."---StevesStox

Dear Steve:

You put a lot of work into that outstanding post! It certainly does earn a super-rec!

"... I would have preferred to use the S&P 500, but it would have been too time-consuming..."

Perhaps the S&P 500 might be analyzed the same way using sectors in lieu of individual companies?

Your inspired Fool,
FM
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Steve,

Wonderful post. What many forget today, is that a share of stock is a portion of the value of a corporation. That value is the proportional share of its book value (today, I would say "if any", positive or negative) plus the present value of its future earnings. Sure predicting those earnings is more art than science, but some of the pricing today reflects earnings more than an order of magnitude opf what is the best possible scenario.

"Q" said: "Having been investing using the Saul method, I see things a little differently." I too made money following the information available on his board, but at some point each of us, who have lived through a number of market downturns, has to evaluate whether it "really is different this time".

While the market can stay irrational longer than those who bet against it can stay solvent, the decision is not binary, and as Steve points out, value stocks generally weather a downturn better than small growth ones do - and usually pay you to wait. The growth stocks which survive will still be there after the wind dies down and you can always rotate back in.

All those who think the stock market will go up every day forever - this is the time to raise your hands, but history has voted against that attitude numerous times in the past.

You can't time the market (it is said), and the market is still paying off - but what is certain is that what goes up, sooner or later usually reverts to the mean - a number which is far below us right now. Pick your time, or not.

Jeff
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"Q" said: "Having been investing using the Saul method, I see things a little differently." I too made money following the information available on his board, but at some point each of us, who have lived through a number of market downturns, has to evaluate whether it "really is different this time".

Second half of 2018 and first half of 2019 I was in that investing style. From June to October I started a rotation out, at one point getting as low as a 10% allocation in those type of stocks. Currently I'm at 35% high growth, with 1/3 of that in a high growth ETF. I am likely to be rotating that down once again over the next two months.

This time is never different. The thing about the Saul investing strategy is that you really will lose more when things tank. The question is, were you in that strategy for a long enough period that you grew the balance high enough, that even after a large set-back you are still better off? That actually can happen, but I do not believe that pertains to me. Nor can I stomach that type of a sell-off in general. So I keep my exposure down.
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Second half of 2018 and first half of 2019 I was in that investing style. From June to October I started a rotation out, at one point getting as low as a 10% allocation in those type of stocks. Currently I'm at 35% high growth, with 1/3 of that in a high growth ETF. I am likely to be rotating that down once again over the next two months.

This time is never different. The thing about the Saul investing strategy is that you really will lose more when things tank. The question is, were you in that strategy for a long enough period that you grew the balance high enough, that even after a large set-back you are still better off? That actually can happen, but I do not believe that pertains to me. Nor can I stomach that type of a sell-off in general. So I keep my exposure down.


You are correct. If you can't pull the trigger on the feelings you have and book a loss as easily as throwing in your cards at penny anti poker, you cannot run a Saul port. I about a half my AYX the other day after hours. Mostly it was because it was more than 20 percent of that portfolio. I turned around and bought about 1/3 back the next morning because I had thought about it some more. The rest I put into Data Dog, but I cannot keep all of it as very quickly Data Dog will grow to more than 20 percent of the port folio.

But, if you can't sleep, don't invest. I have a lot of other money in cash, bonds and ETF's.

Cheers
Qazulight
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But, if you can't sleep, don't invest. I have a lot of other money in cash, bonds and ETF's.

The stocks to fear are the ones that won't ounce back.

The Captain
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You can't time the market (it is said), and the market is still paying off - but what is certain is that what goes up, sooner or later usually reverts to the mean - a number which is far below us right now. Pick your time, or not.

Jeff

I am thinking of taking a little out an investing it in 40 year anniversary cruise to the Mediterranean and a Cat boat.

https://www.vacationstogo.com/fastdeal.cfm?deal=14042

9 day Royal Caribbean.

Friday, September 18 Rome (Civitavecchia), Italy 5:00pm
Saturday, September 19 Siracusa, Sicily, Italy 1:30pm 8:00pm
Sunday, September 20 At Sea
Monday, September 21 Crete (Chania), Greece 7:00am 6:00pm
Tuesday, September 22 Mykonos, Greece 7:00am 7:00pm
Wednesday, September 23 Athens (Piraeus), Greece 6:00am 6:00pm
Thursday, September 24 Santorini, Greece 7:00am 6:00pm
Friday, September 25 At Sea
Saturday, September 26 Naples, Italy 7:00am 6:00pm
Sunday, September 27 Rome (Civitavecchia), Italy 5:00am

and a Catboat.

https://www.yachtworld.com/boats/2006/marshall-sanderling-35...

Guaranteed to lose money on both.

Cheers
Qazulight
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Sounds about right :-)

Jeff
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The stocks to fear are the ones that won't ounce back.

The Captain


Assuming you meant bounce we actually agree for a change.

My high dividend paying Canadian banks and pipelines bounced back nicely after the '08 FUBAR.

https://www.macrotrends.net/stocks/charts/TRP/tc-energy/stoc...

https://www.macrotrends.net/stocks/charts/BNS/bank-of-nova-s...

Tim
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Great post, of course.

I guess the interesting more awkward view that worries me is that revenue has done very little, but profits have soared because net margins of soared.
On current profits, things are not anywhere near as overpriced as the sales figures suggest.

That's partly simply cyclically high profits, but also a big shift in the baseline profitability.
Net profits are just plain high relative to sales, and have been for a while.
This isn't readily apparent in the profit column of your table. I'm not sure why...maybe because it's using the Dow 30 rather than the broad market?
But it's a pretty prominent effect in the S&P 500 set. Profits per S&P 500 point have more than doubled since end 2005, up 56% in real terms.
There are lots of reasons for that---more industry concentration giving monopoly-like pricing power,
lower taxes, lower real interest rates, lower capital intensity due to outsourcing, lower labour
share of income due to a more competitive global labour market, and so on.

This all leads to the very difficult, but necessary, question of estimating how much of the rise in net margins is permanent, and how much is cyclical.

If net margins mean revert to old norms, the high price-to-sales ratios from low revenue growth is correctly pointing out that the market is wildly overvalued and very bad returns are coming.
If they don't, then low sales merely mean that, well, you don't need a lot of sales to make a ton of money any more.

Have a look at a long run graph of corporate profits to GDP, and try to figure out where it might average in the next decade or two.
https://fred.stlouisfed.org/graph/?g=1Pik

Beats me which way it will go.

Until I have better information, I kinda figure
* the portion of the high net margins due to the business cycle will of course fall, then rise again, and so on, as ever.
* the portion which is a long lasting shift is not knowable, but maybe things will mean revert half way to a modern era norm?
This leads to security selections that are safer than those you'd pick betting on 0% mean reversion or 100% mean reversion.
So, on that graph, whaddaya figure as a future "normal"? 8.5% - 9.0%?


A geeky numerical question.
The DJIA does not track the sum of the market caps of the companies within it.
Partly because it's not cap weighted, and partly because of other things, like how they handle split adjustments which cause big discontinuities in weights between firms.
So, comparing the rise in the aggregate profits of those firms to the rise in the aggregate index value is not a reliable comparison, if I understand correctly what you've done.
The conclusions from your table might be off by as little or by a lot, I'm not sure.

Jim
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Gold medal METAR thread. Thank you all.


David fb
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The DJIA does not track the sum of the market caps of the companies within it.

That‘s a very important point.

The Dow is price-weighted (a rather nutty concept really), meaning a 1% move in an ‚expensive’ stock (Boeing) moves the index much more than such a move in a ‚cheap’ stock (Pfizer)... even though Pfizer has the higher market cap!
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The Dow is price-weighted (a rather nutty concept really), meaning a 1% move in an ‚expensive’ stock (Boeing) moves the index much more than such a move in a ‚cheap’ stock (Pfizer)... even though Pfizer has the higher market cap!

It also means that DJIA companies that do well, see their stock rise and do a stock rise are subsequently underweighted in the average. If proper adjustments for stock splits were made the DJIA would be much higher.

DB2
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I guess the interesting more awkward view that worries me is that revenue has done very little, but profits have soared because net margins of soared.
On current profits, things are not anywhere near as overpriced as the sales figures suggest.


I have been suspicious of all the gimmickry that could accompany share buy backs. While, on the surface, your arguments of increasing current profits makes eminent sense, if in fact they are true representations of revenue performance....there are valid cases to be made that perhaps not all is at it seems.

I did a search for: "where does money spent on share buy backs show up on company financial statements" and came across the following investopedia piece that presents several possibilities. Some of which the Graham type investigator may take the time to scrub off the beauty cream and make-up of the financial presentations and see what lies beneath:

How Should You Interpret Buyback Results?
As you can see in this example, there is a major distortion of book value per share due to a major share repurchase done above the current book value per share number. Buybacks improved the EPS from $20 to $40, but lowered book value per share from $150 to $100. Also, notice that the return on equity (ROE) measurement goes from a rather normal 13.3% to an astounding 40%. ROE numbers can make a normal business look extraordinarily good, but should be viewed as an accounting abnormality when a major buyback occurs. (To learn how to spot a wayward return, read Keep Your Eyes On The ROE.)


https://www.investopedia.com/articles/fundamental-analysis/0...
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Wow PFC, this astounds me.
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It also means that DJIA companies that do well, see their stock rise and do a stock rise are subsequently underweighted in the average. If proper adjustments for stock splits were made the DJIA would be much higher.


(a) you meant "and do a stock split"

(b) the calculation of the DJIA includes a divisor such that - hypothetically - if all stocks in the index were unchanged in price from one day to the next except that one of them did a 2-for-1 split and thus saw its price cut exactly in half, the index value would be unchanged.

Of course, you're right about the effect on weighting of different stocks in the index. And also that if none of the stocks in the index had ever split, the index would be much higher.

And the index also ignores dividends.
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The Dow is price-weighted (a rather nutty concept really), meaning a 1% move in an ‚expensive’ stock (Boeing) moves the index much more than such a move in a ‚cheap’ stock (Pfizer)... even though Pfizer has the higher market cap!

We are what we measure!

Want to fix inflation? Add the hedonic factor.

Want to fix the employment rate? Drop those not looking for jobs.

Want to fix climate? Use misleading charts.

The Captain

Want to confuse the Captain? Put a magnet near the compass.
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