The Piton Investment Team combines multiple factors when selecting components of a client’s Piton portfolio, both with an eye toward prudent diversification and toward leaning into areas of greater opportunity. Recent blog entries have highlighted factors in the economy more broadly that can shape where the better opportunities are more likely, but this week they take an updated look at some metrics applied specifically to stocks: size, style, and price-earnings ratios.
One way to do this is to look at a “style box” like the one below. This box combines two factors: size and style. The size refers to the amount of market capitalization invested in a company. Depending on this amount, the company is as ranked small, mid(dle) or large, and the companies being counted are then summed and averaged in the appropriate row. The columns represent investment types, from “Value” (typically more established and stable companies) to “Growth” (typically more recent and dynamic companies), or a blend (“Core”). The various boxes in the grid then can display a variety of metrics to compare and contrast groups of companies by these two variables. The entries could show the percentage change, positive or negative, of stock prices over the past 12 months, for example, to create a snapshot to see whether companies of a certain size and style have had more or less gain during that time period.
This particular grid shows Forward Price-Earnings Ratios. This “Forward P/E” uses analysts’ expectations of the profit per share over the coming 12 months, divided by the current price per share. As a formula, Forward P/E = Current Stock Price ÷ Estimated Earnings per Share (Next 12 Months). By contrast Trailing P/E = Current Stock Price ÷ Estimated Earnings per Share (past 12 Months). For this analysis, the team sticks to the Forward P/E. As Piton’s Senior Vice-President of Research, Chuck D. Etzweiler, MBA, CIMA®, CFP®, CMT, says, “Both versions have their uses, but I’m investing in the profitability of the company in the future, not whether it was profitable in the past.”
In the second copy of the box below, Chuck and the team have highlighted a “P”-shaped pattern where the companies have a noticeably lower Forward P/E than the companies represented in the other entries of the grid. A lower P/E can suggest that a company or type of company is a better value at its current price. In this case, companies that are in the Value or Core Category (except Small Core), as a group, look to have more attractive current prices. This does not dictate stocks that the team will or will not include in a portfolio, but it can be a factor and provide one lens for analyzing the components of a portfolio overall.
Piton clients can be sure that the Piton Investment Team uses tools like this and more constantly to evaluate and update their portfolios, always with the goal of maintaining portfolios that serve the client’s goals the best.