Valuation indicators (8/9)

Taking into account economic sectors?

Many investors prefer to compare valuation indicators within the same economic sector. The idea is to look for a company that is undervalued compared to its competitors. We know that sectors that require a lot of intangible resources and/or growing industries tend to display higher valuation levels. If we only look for low ratios, we risk missing out on entire economic sectors.

That said, studies have shown that so-called "growth" stocks perform worse than so-called "value" stocks. This means that chasing an affordable candidate in a growing industry may not be the right choice.

On the contrary, entire sectors of the economy may be undervalued at any given time. This means that we will encounter a significant amount of cheap stocks in certain sectors at the same time. We see this regularly with cyclicals, such as the automobile industry and financial companies. It is normal that during these periods a value investor would focus on overweighting certain economic sectors, rather than looking for the best opportunity in each industry.

We have exactly the same phenomenon with geographic areas. Currently the USA and Europe are overvalued. It is very difficult to find real opportunities there. On the contrary, most Japanese companies are undervalued. You can come across nuggets without too much difficulty. Why then want to look only for the best deals, within each country, rather than looking for the best opportunities, regardless of the country or economic sector?