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Dividend Payers and Small-Cap Value Stocks

Small Value Stocks

Investors looking at individual stocks might be well served in places other than the largest technology related stocks which now have price to sales multiples similar to prior valuation extremes. Some market observers seem to think valuation excesses are primarily in the mega cap growth stocks and their friends, aka the “FANG” stocks. Other observers have noted what they believe is a generational opportunity to invest in “value” stocks, generally defined as those with low price to book ratios. And yet others assert valuations in the current market are reflective of poor valuations on offer in the banking and energy sector, with premium multiples being accorded to technology and selected consumer stocks. We think there is some truth in all these statements.

Source: Will Hershey

Price to sales ratios in the chart above start to look like those ratios some values investors seek to find in price to earnings ratios. The charts below show growth versus value recast as technology versus banking.

Source: JC Parets

Source: Driehaus

We think the cleanest view of valuation is suggested from a look at recent returns versus market capitalization. Few if any other metrics currently rank so well over a large universe of companies. We suggest investors take a good look at smaller companies where some value should be on offer.

Source: Ben Carlson

Dividend Stocks vs. US Treasuries

What are investors and market strategists to make of extraordinarily low long-term interest rates on US treasuries? Absent the Federal Reserve’s intervention, we suspect rates would of course be higher, but probably not enough to make quality dividend paying stocks lose appeal.

Source: Jeroen Blokland

Source: Lisa Abramowicz

Investors looking for a lower boundary rate for stock valuations could also take clues from the high yield bond market. David Rosenberg observes that many companies actually fund themselves at junk bond rates; using an estimated 2020 earnings level of $163 and a 15.5 price ratio produces an S&P 500 index valuation around 2600. Between the extremes, quality companies that can fund themselves at low rates and pay attractive dividends merit attention.