Some investors place themselves in either the growth camp — focusing on the most rapidly growing companies, no matter how high their stock prices may be — or the value camp, going with slow growers that are trading on the cheap. Today we’re screening a group of hundreds of growth stocks to highlight 10 trading at forward price-to-earnings valuations that are less than half that of the S&P 500.
The screen begins with a large list of stocks in the Russell 1000 Growth Index RLG. This index is a subset of the Russell 1000 Index RUI, which is designed to capture about 93% “of the value of the U.S. equities market,” according to FTSE Russell.
Before running the screen, let’s take a deeper look at the indexes.
There were technically 1,009 companies in the full Russell 1000 Index as of July 31, with 443 of them in the Russell 1000 Growth Index, which includes companies “with relatively higher price-to-book ratios,” higher forecasts for growth over the next two years and “higher sales per share historical growth (5 years),” according to FTSE Russell.
Meanwhile, there were 845 companies in the Russell 1000 Value Index RLV as of July 31. These companies have relatively low price/book ratios, with lower growth forecasts and slower increases in sales per share over the past five years.
Descriptions and factsheets for the Russell indexes are available here.
The Growth and Value subsets have overlapped since June 1995, because FTSE Russell assigns growth and value scores to each component of the Russell 1000 annually, and “a stock with a valuation score at the breakpoint would be assigned 50% to the growth index and 50% to the value index,” for example. So about 30% of the Russell 1000 stocks are in both the Growth and Value subsets. You can read more about FTSE Russell’s style-scoring methodology and the index provider’s analysis of their long-term performance here.
Weighting in the Russell 1000 Value and Growth indexes is by market capitalization, modified by the value or growth scores. Two examples:
- Apple Inc. AAPL,
+1.73%is the largest U.S. company by market capitalization and it is 100% in the Russell 1000 Growth camp. Its weighting in the iShares Russell 1000 ETF IWB, which tracks the full Russell 1000, is 6.6%. Its weighting in the iShares Russell 1000 Growth ETF IWF is 12.5%.
- Regeneron Pharmaceuticals Inc. REGN,
+0.09%is in both camps. Its weighting in the iShares Russell 1000 ETF is 0.21%, while its weighting in the iShares Russell 1000 Growth ETF is 0.03% and its weighting in the iShares Russell 1000 IWD Value ETF is 0.41%.
Here are comparisons of average annual returns for the three Russell 1000 indexes, the three iShares exchange-traded funds that track them, and similar index ETFs run by Vanguard:
|Index or ETF||Ticker||3 years||5 years||10 years||15 years||Annual expenses|
|Russell 1000 Index||RUI||9.8%||10.6%||12.5%||10.9%||N/A|
|iShares Russell 1000 ETF||IWB||9.6%||10.5%||12.3%||10.7%||0.15%|
|Vanguard Russell 1000 ETF||VONE||9.7%||10.5%||12.3%||N/A||0.08%|
|Russell 1000 Growth Index||RLG||8.2%||13.6%||15.5%||13.1%||N/A|
|iShares Russell 1000 Growth ETF||IWF||8.0%||13.4%||15.3%||12.9%||0.19%|
|Vanguard Russell 1000 Growth ETF||VONG||8.1%||13.5%||15.4%||N/A||0.08%|
|Russell 1000 Value Index||RLV||11.3%||7.0%||9.1%||8.3%||N/A|
|iShares Russell 1000 Value ETF||IWD||11.1%||6.8%||8.9%||8.2%||0.19%|
|Vanguard Russell 1000 Value ETF||VONV||11.2%||6.9%||9.0%||N/A||0.08%|
The average annual returns are net of expenses and include reinvested dividends.
Screening the Russell 1000 Growth Index for value
The iShares Russell 1000 ETF trades at a weighted forward price-to-earnings ratio of 18.9, based on consensus earnings estimates among analysts polled by FactSet. The iShares Russell 1000 Growth ETF trades at a forward P/E of 26, while the forward P/E for the iShares Russell 1000 Value ETF is 14.4.
To narrow the 443 stocks in the Russell 1000 Growth Index to 10 that are trading on the cheap, based only on forward P/E, we can set a limit of 10 for the valuation — but let’s add two more filters.
First, we’ll limit the list to 432 companies that are covered by at least five analysts polled by FactSet, to ensure some variety of opinion behind the earnings estimates.
Then we’ll narrow to 33 companies trading at forward P/E ratios of 10.0 or less. We’ll make another cut to include only companies whose current forward P/E ratios are at least 20% below their 10-year averages, according to FactSet. This pares the list to 27 companies. If a stock has been listed for less than 10 years, we have used the average forward P/E for the entire period.
Exactly 10 of the 27 companies are rated buy or the equivalent by at least 75% of the analysts. Here they are, with a summary of analysts’ opinions and the P/E ratios:
|Company||Ticker||Share buy ratings||Aug. 29 price||Consensus price target||Implied 12-month upside potential||Forward P/E||10-year average P/E|
|Delta Air Lines Inc.|| DAL,
|Cheniere Energy Inc.|| LNG,
|Nexstar Media Group Inc.|| NXST,
|Vistra Corp.|| VST,
|Jazz Pharmaceuticals PLC|| JAZZ,
|First Citizens BancShares Inc. Class A|| FCNCA,
|Graphic Packaging Holding Co.|| GPK,
|Everest Group Ltd.|| EG,
|Brunswick Corp.|| BC,
|New Fortress Energy LLC Class A|| NFE,
Click on the tickers for more about each company, ETF or index.