Value Versus Growth

Anand Chokkavelu, has an interesting slant on the big boys in the stock market.

He points out that the Dow Jones Industrial Average (INDEX: ^DJI) is made up of the stocks of just 30 companies. Yet these 30 stocks make up more than a quarter of the total market value of the entire U.S. stock market. These are blue chip organizations that are household names.Today, these companies are inexpensive to buy, despite their size and stability. With a decade of close to zero returns, these equities are not highly prized. The result is that the 30 stocks in the Dow are now cheaper than the rest of the stock market.

To assess cheapness, he used a five-year P/E ratio. In other words, today's price divided by the five-year average of earnings. Looking at five years balances the need to include good years and bad with the need to include timely data.

With, a regular one-year P/E ratio under 15 is pretty attractive for a large blue chip. Seeing nearly half the Dow stocks with five-year P/E ratios under 15 is mouthwatering.

Source: S&P Capital IQ.

I thought about what this meant and how we could use this

I am looking for a blind filter. I don't want to examine the current operation of the company and decide whether management has it together or whether the company is on a winning streak because I want a long term investment that will stand the test of time. There are pundits who do that and recommend a company because of its short term prospects.

We know that all of these companies are large corporations and are not likely to go out of business. What we can deduce is that those with the higher P/E's are growth stocks -- whereas the lower P/E's are value stocks -- all within the boundary of them being large cap, safe equities.

So, I decided to create two portfolios around the average of 15 and compare the returns to see what that gave us.

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