No. of Recommendations: 22
Looking at sales per share alone isn't very useful when comparing two separate companies, and is even misleading. But it is pretty good when comparing a single company with itself over different periods, and it is extremely good when viewing as single index over different periods.
The sales multiple of any index rises and falls over time, and margins also expand and contract, so to track the increase in value of the indexes it far better to track the rate of change of sales. It is very simple, and about as good as more sophisticated portrayals of intrinsic value growth.
It is certainly more informative than looking at the change in EPS, subject to margins expanding and compressing over time, and exceedingly better than just looking at the change in quote.
10-year 10-year
Sales growth Margins
======= =======
S&P500 67% 25% (10.7% to 13.4%)
Mid-caps* 84% 25% (6.5% to 8.1%)
* For Mid-caps, I used the S&P400, however the result is similar to the small caps (S&P600) and the RSP (equal-weight). The S&P500 has its own very specific behavior, whilst RSP, S&P400 and S&P600 are so correlated (both in valuation multiples, sales per share and margins) that frankly it isn't important which of the 3 you select.
I showed the change in margins to clarify that the increased margins is not exclusive to the S&P500 as commonly thought.
What explains the S&P500 outperformance is not the margin expansion, nor the superior sales growth (in fact, the sales of the S&P500 the last 10 years were inferior to small caps, mid caps and equal weight).
The superior quotation change of the S&P500 is owing merely to the higher sales per share expansion.
With the price/sales ratio of the S&P500 is now at a historical high, it almost certain than further expansion over the next 10 years is out of the question.
S&P500 price/sales ratio:
Current Last high Recent low 20-year low 20-year avg
3.1x 3.0x (Dec 21) 2.1x (Sept 22) 0.8x (Mar 09) 1.8x
Betting on the S&P500 to continue reasonably strong returns and also outperform the Mid-cap indexes over the next decade is a bet on (1) the sales/per share multiple rising from its current 3.1x to ever higher historical levels, and (2) for this multiple expansion rate to be higher than the multiple expansion rate of the mid-caps (which are starting at a much lower level), and (3) for the multiple expansion rate to be not only higher, but higher by the amount that the Mid-caps outperform the S&P500 by sales/per share as they have done the last 10 years and over longer periods.
Even if we pass 1, then we have to also pass 2. Even if we pass 2 then we have to also pass 3. Only then do we have the S&P500 outperform mid-caps for the next decade. I think this is possible, if you like to betting on small speculative probabilities, but very unlikely.
If the price/sales ratio the S&P500 doesn't fall from its historical high, and is sustained at the current 3.1x level for the next decade, and the RSP continues to outperform the S&P500 in sales at its historically average (and recent) level of 2%, then RSP will be the better investment.
- Manlobbi
