Why Stop at 65 Times Earnings?
Published May 13, 2019
Head of Equity Strategy
Amazon is trying to take over the world, right? At 65, its price/earnings multiple anticipates perfection. At some point you hit reality: a company that is valued at $919 billion, rallying hard for years, may be underestimating the very real possibility that someone in Washington will step in and break it up.
Democratic presidential hopeful Elizabeth Warren wants to cut a handful of large tech companies down to size. If Donald Trump’s more than two dozen anti-Amazon tweets are any indication, he may also be on the case. Currently, the company is the most underweighted holding relative to the S&P 500 in the WisdomTree U.S. LargeCap Fund (EPS), our 8 bps twist on beta (figure 1).
Figure 1: EPS’s Largest Underweights vs. S&P 500
Amazon bulls point to the company’s impressive 91% annual earnings growth in the three years ending 2018. But that may be the company’s Achilles’ heel: the ghost of Teddy Roosevelt could look at figure 2 and think, “Standard Oil.”
Figure 2: Amazon through the Years: Adjusted Earnings per Share
Figure 3 shows the WisdomTree U.S. LargeCap ETF’s largest overweights. Because companies are ranked by the quantity of their earnings, it picks up Apple and a handful of financial giants, among others. Currently, the former is not as much of a breakup candidate as some of tech’s other political targets, partly because it is engaged in a fierce smartphone battle that has the Street anticipating a 3.1% earnings decline this year.
Yes, the banks have been a regulatory risk since the financial crisis, but the Street is sober on them, with companies like Goldman Sachs trading for eight times last year’s earnings. Hardly bubbly.
Figure 3: EPS’s Largest Overweights vs. S&P 500
If Teddy Roosevelt makes a comeback, investors may want to reconsider their allegiance to cap weighting.
Currently, EPS is a Morningstar 4-star fund1 despite two headwinds: it had the hurdle of a 0.28% expense ratio for many years (we dropped it to 0.08% in March). Also, it skews toward value within the core and has been facing a market that favors growth stocks since we launched it in 2007 (figure 4).
Figure 4:Morningstar Style Box:WisdomTree U.S. Large Cap ETF (EPS)
With the fee drop, we are putting EPS head-to-head with the meat of the portfolio’s core—up against all these index funds that are loaded with Facebook, Amazon and the rest. If Teddy reappears, EPS’s under-weight to Big Tech may be just what the doctor ordered.
1As of 3/29/19 Overall rating based on risk-adjusted returns out of 1,218 funds for the US Fund Large Blend category
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. Funds focusing their investments on certain sectors increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
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About the contributor
Head of Equity Strategy
Jeff Weniger, CFA, has been with WisdomTree since 2017 and serves as the Head of Equities. He shapes the firm’s market outlook through a combination of macroeconomic and fundamental analysis. With more than two decades in investment strategy, Jeff is known for his work on market cycles and valuations. Before joining WisdomTree, Jeff was with BMO Private Bank and BMO Global Asset Management for 11 years. At BMO, he sat on the firm’s Asset Allocation Committee and co-managed ETF model portfolios across the U.S. and Canada. In 2013, at age 32, he became the youngest member of BMO’s Global Investment Forum. When he left BMO to come to WisdomTree, his final role was Director, Senior Strategist in the Office of the CIO in 2017.
Jeff is a frequent television guest on networks such as CNBC, Bloomberg, and Schwab, with regular print appearances in The Wall Street Journal, Barron’s and Reuters. He also appears weekly on the Behind the Markets podcast and is a regular on SiriusXM’s The Business Briefing. On X, Jeff has developed one of the larger followings in financial media. He earned a B.S. in Finance from the University of Florida and an MBA from the University of Notre Dame. He has held the CFA charter since 2006.