Sell In May? DIA, QQQ, SPY, IWM

Sell in may and go away is a popular catch phrase for media headlines at the beginning of summer almost every year, but before you do that it is important to understand relative valuation for the broader markets.  Our focus here is on the Dow Jones industrial average, which is represented by the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), but these observations largely roll over to the S&P 500, whose ETF is SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the NASDAQ and PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ), and the Russell 2000 iShares Russell 2000 Index (ETF) (NYSEARCA:IWM).

Next year analysts are expecting earnings growth of 9.35% from the DJIA.  That would be a substantial recovery because the last four quarters were down big and this year earnings growth is expected to be down by 7.4% too, but it is important to note that even with that recovery, should it happen, the 2-year growth for the DJIA will be flat.

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So what do the earnings trends look like (charts are on our home page)?

We evaluate earnings and earnings growth alongside revenues and dividends using the Multiplier and constituent listings while reflecting the changes to the DJIA over time.  This is not an easy task, but the effort is very revealing.  It helps us properly value the DJIA.

Starting facts:

  • Earnings Peaked in Q4 2013 and since then have declined by 21%.
  • Revenues Peaked in Q4 2012 and have since declined by 25%
  • The DJIA has increased by 33% since Q4 2012

The PE multiple for the DJIA (if price remains the same):

  • The PE is Currently 13.63
  • Expected to increase by 16% to 15.89 this year.
  • Expected to decline to 14.53 at the end of 2017
  • By the end of 2017 the multiple is expected to be 6.6% higher than today.

Based on this information alone we can begin to question immediate value in the DJIA, but there is something else to consider.  Earnings projections for 2017 can be materially adjusted; even results for the current quarter can be adjusted right before the data comes, so we must take the projected 9.35% growth rate in 2017 with a grain of salt.  Even if it were achieved valuation would be questionable, because the data above reflects that, but if the 2017 numbers are lower the valuation for the DJIA will become even more stretched.

It is difficult to evaluate PEG ratios when earnings growth is negative, but since November 2014 the PEG ratio for the DJIA has either been too high or negative.  We consider a PEG ratio, using our current and projected earnings model, to represent an attractive value when the PEG ratio is between 0 and 1.5.  The DJIA has not been in this range for a long time, which means it has lacked value for a long time, and you can largely see that reflected in its inability to press higher, but in addition the PEG ratio will remain above 1.5 if 2017 estimates are matched, so even if these high growth numbers are realized and they do not come down (we expect them to come down), valuation will still be stretched.

In our opinion, based on Earnings Growth trends and expectations, we believe the DJIA has been expensive, and continues to be expensive.

Stock Traders Daily provides valuation analysis for all 30 DJIA stocks individually as well, in addition to 1300 other stocks.  Visit Stock Traders Daily for that additional analysis.

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