Forget price to earnings; this fund family's focus on price-to-sales weightings had led to above-average long-term performance. Below we talk with Vince Lowry, CEO of the RevenueShares funds.
Steve Halpern: How are you doing today, Vince?
Vince Lowry: I'm great. How are you doing?
Steve Halpern: Very good. Thank you for joining us. Your family of funds are set apart in that they focus on price-to-sales as a fundamental measure of value. Could you explain to our listeners why you have chosen this metric as opposed to more traditional evaluation methods such as price-to-earnings?
Vince Lowry: Well, what we do is, we take the S&P indices and we replicate each constituent, but we weight the constituents by their total sales, or revenues, and that becomes the weighting divided by the total revenues of the index.
And the reason for that is that we end up with a stock that, its weighting in the portfolio becomes a price-to-sales weighting and, why that is important is, as we look at the data going back, price-to-sales is a more durable and more optimal, and, I believe, over time, more accurate measurement to determine the future performance of those stocks over time.
So we decided that we're going to stay with just that one metric, because as you go down the income statement, with revenue sales number being at the very top, and as you go down the income statement and you begin to hit various levels, whether it's even to odd numbers netting, you get the dividends, and so on, becomes less reliable as a measurement to weight an equity in a portfolio than the top-line number.
Steve Halpern: Now, you utilize the price-to-sales measure to also assess the value of the overall market. What is your current strategy say about the general outlook for investors?
Vince Lowry: Well, the general outlook right now is that the markets are not overpriced, but they're no longer underpriced, and, by way of example: Look at the S&P 500 that is trading, and this is the way we look at it.
If you take the entire S&P 500 (SPX) and bought that as a composite index such as buying the Spyder (SPY), you would be paying on average $1.60 to $1.62 in total capitalization for every $1 in annual revenue, so, if you put that in an historical basis, at the top, in 1999, when the market was completely overvalued, you were paying roughly $2.47 for that price-to-sales, and today, you're at $1.62.
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The long-term average, since, let's say, 1994 forward, is about $1.51. You're right in there, when you consider that the interest rates are, the yield curves are a little over three maybe, compared to it's usually over six. That makes the market on that basis fairly valued at this point.
Now, if you revenue weight and do a price-to-sales of that same S&P 500 that now trades for $1.62, but you weight the stocks by their revenues, you're paying about $0.77 for every $1 in annual revenue.
And that's important because what we know looking at the data is that the higher the price-to-sales that you pay for a company, you're maybe buying a great company, but the higher the price-to-sales, the faster the treadmill that company is on, and you typically end up owning a great company but a bad stock.
You're better off earning a lower price to sales over time and a basket of stocks than a higher price to sales. The data is clear as we look back in history.
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