Capital Markets: Observations & Insights
Party Without the Punch? - Spring 2018
Capital Markets: Observations and Insights Party Without the Punch? Spring 2018
Party Without the Punch?
In what is a long-standing analogy, the Fed provides the punch at the economic party to keep executives and investors happy, but when the Fed raises interest rates and takes away the proverbial punchbowl, the party becomes much less fun (and profitable). After many years of economic expansion, short-term interest rates around the world are now rising. In addition, global central bank balance sheets are likely to peak in the next year and then begin to contract. As interest rates rise, there will likely be broad implications for asset classes as well as specific sectors and securities. In mid-2016, amid the craze for income-generating investments, we asked whether investors were “ Searching for Yield and Asking for Trouble ?” in our capital markets update. Since then, bond-like equity sectors such as telecommunications and real estate have generated negative returns, dramatically underperforming the broader market. Now, the press is full of headlines regarding the outlook for interest rates and their impact. In our view, there is too much fear from an equity perspective and not enough anxiety in bonds and real estate. So how will this tightening cycle play out? How do you have fun at a party where the punch is being removed? On the pages that follow we’ll try and answer those questions, but in short, our view is don’t party too hard and aim to have fun at either a lively shindig or a quiet get-together. In investing, that means focusing on innovation rather than the economic cycle.
Daniel C. Chung, CFA Chief Executive Officer Chief Investment Officer
Brad Neuman, CFA Senior Vice President Client Investment Strategist
Page 1
Key Observations
• Monetary conditions are tightening but stocks and the economy should be able to absorb moderate increases in interest rates • Business spending has begun to accelerate and outpace the broader economy, driven by strong earnings growth, tax reform, solid business confidence, and accommodative lending conditions • Leading indicators suggest the economy will continue to expand and corporate profits will continue to rise
Table of Contents
Party Without the Punch?
Pages 3-10
Performance
Pages 11-16
Fundamentals
Pages 17-23
Valuation
Pages 24-27
Page 2
Tightening Underway Party Without the Punch?
• As the Federal Reserve normalizes policy… • …It is driving short-term interest rates higher
• This is largely a worldwide phenomenon…
• ...Because of the interconnectedness of the global economies
U.S. 2-Year Treasury Yield
G7 + China 2-Year Government Yield Year-over-Year Change
2.5%
120
2.0%
80
40
1.5%
0
1.0%
-40
Basis Points
0.5%
-80
-120
0.0%
Italy
U.S.
U.K.
China
Japan
Jul-16
Jul-17
France
Jan-17
Jan-18
Mar-16
Mar-17
Mar-18
Nov-16
Nov-17
Sep-16
Sep-17
May-16
May-17
Canada
Germany
Source: FactSet as of 3/29/18.
Page 3
Party Without the Punch?
Interest Rate Tailwinds
• Global central banks are moving from monetary stimulus and quantitative easing (i.e., bond buying) to monetary tightening and fiscal stimulus (i.e., bond selling/issuance) • Inflation is rising as the economy is now operating above its potential (i.e., tight asset/labor utilization)
Central Bank Balance Sheets (U.S., ECB, BOJ)
16
30%
14
25%
Year-over-Year Change
12
20%
Central banks are ending extremely accommodative policy
10
15%
8
10%
$ Trillions
6
5%
4
0%
2
0
-5%
2011
2012
2013
2014
2015
2016
2017
2018E
2019E
Source: Evercore ISI as of March 2018.
Page 4
Addressing Rising Rate Concerns – Valuation Party Without the Punch?
• Concern: will rising interest rates weigh on P/E multiples?
• Our take: P/Es never priced in how low interest rates had become (see gap below) so we believe earnings multiples may not suffer when rates rise
S&P 500 EPS Yield
Treasury Bond Yield
16%
14%
Interest rates can rise without impact on stock valuations
12%
10%
8%
6%
>300 bps
4%
2%
0%
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Source: FactSet, Federal Reserve, and S&P, as of 3/31/18.
Page 5
Addressing Rising Rate Concerns – Economic Growth Party Without the Punch?
• Concern: will rising interest rates slow economic growth?
• Our take: the Fed is tightening slowly (approximately 75bps per year) and given the impact shown below, the economy can likely absorb modest increases in interest rates like those we have experienced
Estimated Impact of 100bps Increase in the Federal Funds Rate
Modest increases in interest rates are manageable and unlikely to result in recession
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
U.S. Real GDP Growth
0.0%
1
2
3
4
5
6
7
8
9
Months After Increase
Source: Current real GDP growth is based on 2018 FactSet consensus. Effect of 100bps increase in Fed Funds rate is based on output gap impact shown in FRB/US Model (November 2014 VAR version).
Page 6
Fed Tightening Not That Scary Party Without the Punch?
• The stock market has historically risen with the Federal Funds rate
S&P 500
Fed Funds Increase
130
3.5
Cumulative Percentage Point Increase
3.0
In the past several tightening periods, stocks have actually increased alongside the Fed Funds rate
120
2.5
2.0
110
1.5
1.0
100
0.5
Total Return Indexed to 100
90
-
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Months of Tightening Cycle
Source: FactSet. Monthly average of past two-year tightening cycles beginning in January 1994, May 1999 and May 2004. S&P 500 is based on total return.
Page 7
Different Performance Regime Party Without the Punch?
• What worked in a falling rate environment may not work going forward
Rising vs. Falling Rate Environments Annual Real Returns 1955-2017
Stocks Bonds
0% 1% 2% 3% 4% 5% 6% 7%
6.2%
5.8%
5.2%
Asset allocation is more important when rates are rising
-4% -3% -2% -1%
Average Annual Return
-2.7%
Falling Fed Funds Rates
Rising Fed Funds Rates
Source: FactSet and Aswath Damodaran. “Stocks” is the S&P 500. “Bonds” is the constant maturity U.S. 10-year Treasury bond return. Real return is calculated as nominal less 3 month U.S. T-bill return annually. Return over the period is calculated using a simple average of annual returns.
Page 8
Party Without the Punch?
Innovation Grows Through Downturns
• If the global economy does ultimately weaken as a result of prolonged interest rate increases… • …Invest with a focus on innovation because it has outpaced difficult economic environments
Innovative Areas of the Economy Outperformed Even in the Global Financial Crisis
U.S. Internet Ad Revenue U.S. E-Commerce U.S. Total Retail Sales
140
+33%
130
Innovation Outperforms
120
110
100
+1%
90
80
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
Source: FactSet.
Page 9
Party Without the Punch?
Innovative Companies Often Outperform
• Studies have shown, and our research demonstrates, that the most innovative companies grow their sales, earnings, and stock prices faster*
Innovation Drives Outperformance
600
Most Innovative +17.4% / year
500
400
300
Least Innovative +8.7% / year
200
100
-
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: FactSet. Most/least innovative stock performance is derived from highest and lowest S&P 1500 quintiles based on R&D as % of sales, normalized for market value, using one month returns for 10 years ending January 31, 2018. * Baruch Lev and Suresh Radhakrishnan, “The Stock Market Valuation of R&D Leaders.”
Page 10
Tech Leads Again Performance
• Technology’s outperformance in 1Q18 was due to solid fundamentals as the sector had a very strong earnings season with the best revenue results relative to expectations*
1Q18 Returns (%)
2017 Returns (%)
U.S.
World
U.S.
World
50
4
40
2
30
0
-2
20
-4
10
-6
0
-8
-10
Energy
Utilities
Energy
Utilities
Telecom
Materials
Telecom
Materials
Financials
Industrials
Financials
Industrials
Technology
Real Estate
Health Care
Technology
Real Estate
Health Care
Consumer Staples
Consumer Staples
Consumer Discretionary
Consumer Discretionary
Source: FactSet as of 3/31/18. U.S. represented by S&P 500 and World represented by MSCI AC World Index in local currency.*For the 4Q17 earnings season reported in 1Q18 based on the percentage of companies exceeding estimates.
Page 11
Yield Punished Performance
• In 1Q18, rising interest rates continued to put pressure on high dividend yielding stocks, driving underperformance of that factor
2017 Excess Return (%)
1Q18 Excess Return (%)
2.6
1.1 1.0
0.1 0.1 0.1 0.0
-0.1 -0.3 -0.5 -0.6 -0.7 -0.7
-0.3
-0.7
-1.2
-1.6 -1.8 -1.9
-1.7
-3.5
-4.0
Market Cap
Book / Price
EPS Growth
Debt / Equity
Price Volatility
Dividend Yield
Market Cap
Trading Activity
Book / Price
Earnings / Price
Revenue / Price
EPS Growth
Debt / Equity
Relative Strength
Price Volatility
Dividend Yield
Trading Activity
Earnings Variability
Earnings / Price
Revenue / Price
Relative Strength
Earnings Variability
Source: FactSet as of 3/31/18 using Northfield defined quantitative factors for the Northfield broad U.S. market database.
Page 12
The Earnings Growth Explosion Is Driving Performance Performance
Total Return = Dividend Yield + EPS Growth +/- P/E Change
MSCI All Country World Index ex-USA
S&P 500
Dividend
EPS Growth*
P/E Change
Dividend
EPS Growth*
P/E Change
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
EPS Growth Explosion
0%
-5%
EPS Growth Explosion
-5%
-10%
-10%
-15%
-15%
-20%
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
12- Month Total Return:
12- Month Total Return:
9%
14%
22%
13%
2%
17%
14%
-4%
13%
13%
16%
-10%
18%
9%
Source: FactSet as of 3/31/18. *Based on consensus estimates of next 12-month EPS. Actual earnings per share might be materially different than shown. MSCI ACWI ex-US performance based on local currency.
Page 13
Performance
Bull Market Is Aging Well
• Bull markets have been getting longer over time
‒ Factors prolonging economic expansions include: increased fiscal and monetary intervention, structural changes in the economy, and technological advances, such as improved inventory management
‒ The current bull market is three-and-a-quarter years younger than the ‘90s bull market
14
2010-Current Average: ?? Years
12
1980-2010 Average: 7.2 Years
10
1950-1980 Average: 4.3 Years
Current Bull Market (ongoing)
8
1930-1950 Average: 1.7 Years
6
4
2
Duration of Bull Market (Years)
0
1932
1943
1954
1965
1976
1987
1998
2009
2020
Year that Bull Market Ended
Source: FactSet and Goldman Sachs as of 3/31/18. Bull markets over six months in duration since 1930. Line is based on linear regression of displayed data points.
Page 14
Performance
Has Active Relative Performance Troughed?
• As some of those factors reverse, active management has been doing better ‒ Interest rates no longer declining/bond- like equities not outperforming ‒ Non-U.S. stocks have fared better ‒ Small caps beginning to recover ‒ Market performance more subdued
• Powerful cyclical factors impact U.S. active relative performance: ‒ Interest rates/bond-like equities ‒ Non-U.S. stock performance ‒ Small cap performance ‒ Overall market performance
% of U.S. Large Cap Active Managers Outperforming
Active Relative Performance Is Cyclical
100%
80%
57.4%
53.8%
60%
40%
20% % of Fund Assets Outperforming
0%
Last 12 Months
YTD
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
Source: Left chart: Nomura/Instinet, Joseph Mezrich and FactSet through 3/31/18. Fund performance is trailing five-year data of U.S. active equity mutual funds in existence for 5 years or more and part of the growth, growth & income, and income categories based on CRSP codes. Right chart: Bank of America Merrill Lynch U.S. Equity and U.S. Quant Strategy using Lipper data relative to Russell benchmarks through 3/31/18.
Page 15
Performance
Structural Issues Driving Growth vs. Value
• Growth stocks have dramatically outperformed (+38%) Value stocks over the past decade
• The culprit for value investors has been the very weak performance of buying low P/B stocks, while P/E strategies have fared much better • Book value, used heavily in index classification of Growth vs. Value, may no longer be as relevant given changing business models, e.g., R&D is not capitalized in book value
110
P/E
100
P/B, not P/E, has driven Value underperformance
90
80
P/B Russell 1000 Value / Growth
70
60
50 Total Return Index
40
2008
2010
2012
2014
2016
2018
Source: FactSet as of 3/31/18. Price-to-earnings and price-to-book returns are based on the E/P and B/P Northfield factors for the Northfield broad U.S. market database.
Page 16
Fundamentals
Leading Indicators Suggest Continued Expansion
• The LEI historically leads S&P 500 EPS by 6-18 months
• Typically the Leading Economic Index (LEI) expands by a double-digit percentage peak-to-peak • Using the average of the past three periods implies a peak in late 2019
• The record LEI reading in 1Q18 suggests EPS have room to run
Recession LEI
Peak
110
120
$170
Only 6%
12%
100
$150
100
36%
18 Month Lead
80
S&P 500 EPS
$130
18%
90
60
$110
40
$90
80
20
$70
Leading Economic Index
0
70
$50
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: FactSet, Conference Board, Evercore ISI. EPS estimates based on next 12-months consensus.
Page 17
Business Spending to Accelerate Further Fundamentals
• Drivers of faster corporate expenditures include:
‒ Strong profit growth
‒ Tax reform—lower statutory rates, foreign profit repatriation, accelerated depreciation
‒ Higher business confidence—driven in part by lower regulation and certainty on taxes
‒ Accommodative financial conditions—banks’ willingness to lend and low credit spreads
S&P 500 EPS
Business Spending
20%
An acceleration in earnings growth should help drive a double-digit increase in business spending
15%
Forecasted
10%
5%
0%
Year-Over-Year Change
-5%
2011
2012
2013
2014
2015
2016
2017
2018E
Source: FactSet. Business spending is U.S. private fixed nonresidential investment with an estimate for 2018 based on a regression with S&P 500 EPS. S&P 500 EPS 2018 estimate based on consensus.
Page 18
Fundamentals
Economic Outlook
Tailwinds
• Robust corporate profits
• Strong business and consumer confidence
• Strengthening corporate spending
• Solid U.S. consumer balance sheet
Headwinds
• Tightening monetary policy
• Rising U.S. labor costs
• Potential trade war
• China growth slowdown
• Geopolitical risk
Page 19
Monetary Policy Is Not Restrictive Fundamentals
• Over the past half century, every U.S. recession has been preceded by a significantly positive real Federal Funds rate of 2% or higher
• In contrast, today we have a real Fed Funds rate of about 0%
Real Federal Funds Rate Prior to U.S. Recessions
10%
5%
Today real short-term interest rates are far
4%
4%
4%
3%
3%
2%
lower than what induced previous recessions
2%
0%
Source: FactSet as of March 2018. Inflation represented by PCE Price Index ex-food and energy (year over year). Nominal Federal Funds rate is average of 3 months prior to recession. Horizontal axis labels denote recession periods.
Page 20
Tariffs Likely to Create Opportunity Fundamentals
• Proposed tariffs are manageable
‒ While market sentiment is likely to be impacted, history suggests the long-term outcome will be better than the current bluster implies, due to negotiation and flexible supply chains that can often adjust with minimal impact
• Tariffs will create winners and losers that necessitates active management
‒ U.S. Chicken Tax of 1963, which taxed imported light trucks, hurt international auto manufactures and drove American companies’ dominant share in pickup trucks
China Trade Comparison to Global GDP
$79 Trillion
China - U.S. bilateral trade is only 0.8% of global economy
$506 Billion
$130 Billion
Global GDP U.S. Imports from China U.S. Exports to China
Source: IMF World Economic Outlook, U.S. Census Bureau, FactSet. Data is for 2017.
Page 21
Smaller Capitalization Stocks Poised to Outperform Fundamentals
• Stronger fundamentals : Estimated small cap EPS growth for ‘18 & ‘19 is double that of large cap
• More levered domestic economy : Small caps are more U.S.-oriented, have less exposure to international trade, and have higher operating leverage • Rising interest rates : Small caps have historically outperformed large caps in rising rate environments
• Attractive valuation : Small cap sales multiple discount implies opportunity
Earnings Per Share
Enterprise Value/Sales Russell 2000 / Russell 1000
0%
R2000 R1000
180
Historically Large Discount
-10%
Small Caps Growing Faster
160
-20%
140
-30%
Average
120
EPS Indexed to 100
-40%
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2017
2018
2019
Source: FactSet as of March 2018. EPS for 2018-2019 are consensus estimates and actual earnings per share might be materially different than shown.
Page 22
Fundamentals
The Growth Advantage
• Three variables drive P/E multiples: growth, returns, and risk
• As compared to the Russell 1000 Value Index, the Russell 1000 Growth Index has higher expected EPS growth, higher returns on equity, and lower risk in the form of better balance sheets
Stronger Growth
Higher Returns
Lower Risk
R1000G R1000V
R1000G R1000V
R1000G R1000V
2.5x
24.9%
15.4%
9.6%
1.3x
10.6%
Long-Term EPS Growth
Return on Equity
Net Debt / EBITDA
Source: FactSet as of 3/31/18. Growth represents consensus long-term analyst estimates, and actual future EPS growth rates might be materially different than the forecasts shown.
Page 23
Not All Sectors Are Expensive Valuation
• Growth-oriented sectors are attractively valued compared to history, particularly given low levels of interest rates, in contrast to many other sectors
P/E Relative to 20-Year Median
18%
12%
Attractively valued
12%
6%
4%
3%
2%
-3%
-7%
Utilities
Materials
Financials
Industrials
Technology
Health Care
Real Estate
Cons. Staples
Cons. Discretionary
Source: FactSet, based on S&P 500 Index, 3/31/18. Note: energy and telecom are excluded; the former because of an extremely high P/E due to depressed earnings and the latter owing to a small number of constituents. Real estate is a new sector classification, so for the historical data shown above, the industry group category that has nearly17 years of data was utilized.
Page 24
Growth Valuations Are Reasonable Valuation
• Despite their recent outperformance, Growth stocks remain reasonably valued compared to Value stocks, relative to history and their respective growth rates
Russell 1000 Growth vs. Russell 1000 Value PEG Ratio (P/E Divided by Long-Term Growth Rate)
Russell 1000 Growth Relative to Russell 1000 Value P/E
1.5x
37% premium is reasonable relative to history
1.3x
Median
Russell 1000 Value
Russell 1000 Growth
Source: FactSet, Bank of America as of 3/31/18.
Page 25
Global Multiples High but Not Relative to Interest Rates Valuation
• Price-to-earnings multiples around the world are moderately high relative to history at nearly one standard deviation above their average ‒ Drivers of higher multiples relative to history include lower than average bond yields and a measurement period depressed by the aftermath of the Global Financial Crisis
= current
Price-to-Earnings Multiple +/- 2 Standard Deviations from 15-Year Average
= +2 std dev
20x
= average
= -2 std dev
15x
EM is least expensive in
10x
absolute terms while EAFE is cheapest relative to history
5x
S&P 500 MSCI AC World MSCI EAFE MSCI EM
Z-Score (Standard Deviations Above/Below Mean)
1.0
0.7
0.3
0.7
Source: FactSet. Monthly estimates over past 15 years, ending 3/31/18.
Page 26
Valuation The Single Greatest Predictor of Future Stock Market Returns
• There is a strong relationship between starting valuations and ensuing 10-year returns
• Current valuations suggest equities, particularly growth stocks, should materially outperform bonds over the coming decade
S&P 500 P/E vs. 10-Year Returns
Russell 1000 Growth P/E vs. 10-Year Returns
= month
= current
peak of tech bubble
25%
25%
R² = 0.79 (0.85 ex-tech bubble)
R² = 0.85
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
5
10
15
20
25
30
5
10
15
20
25
S&P 500 10-Year Annualized Return
Russell 1000G 10-Year Annualized Return
Russell 1000 Growth Price/Earnings
S&P 500 Price/Earnings
Source: FactSet. Monthly data through March 2018 and beginning in January 1986 (S&P 500) and December 1978 (Russell 1000 Growth). The tech bubble, represented by the 10- year returns beginning in April 1987-March 1990 and ending in April 1997- March 2000, skewed the regression by resulting in higher returns for given valuations than the historical relationship would imply.
Page 27
Disclosure The views expressed are the views of Fred Alger Management, Inc. as of March 2018. Alger has used sources of information which it believes to be reliable; however, this publication is not intended to be and does not constitute investment advice. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security, or any funds managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities. Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities. References to or implications regarding the performance of an individual security or group of securities are not intended as an indication of the characteristics or performance of any specific sector, industry, security, group of securities, or a portfolio and are for illustrative purposes only.
Risk Disclosures : Investing in the stock market involves gains and losses and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as the prices of growth stocks tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political and economic developments.
The S&P 500 Index is an unmanaged index generally representative of the U.S. stock market without regard to company size. The S&P Composite 1500 is an unmanaged index that covers approximately 90% of the U.S. market capitalization. The Russell 1000® Growth Index is an unmanaged index designed to measure the performance of the largest 1000 companies in the Russell 3000 Index with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Growth Index is an unmanaged index generally representative of common stocks designed to track performance of small- capitalization companies with greater than average growth orientation. The Russell 2000 Value Index is an unmanaged index generally representative of the small-cap value segment of the U.S. equity universe and measures the performance of Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 3000® Growth Index is an unmanaged index designed to measure the performance of those Russell 3000® Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 3000 Value Index is an unmanaged index generally representative of stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates. The MSCI ACWI Index (gross) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 45 country indices comprising 24 developed and 21 emerging market country indices. The MSCI ACWI ex USA Index (gross) captures large and mid cap representation across 23 of 24 Developed Markets (DM) countries excluding the US) and 23 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the US. The indices presented are provided for illustrative purposes, reflect the reinvestment of dividends and do not assess fees and expenses that would have the effect of reducing returns. Investors cannot invest directly in any index. The index performance does not represent the returns of any portfolio advised by Fred Alger Management, Inc. and actual client results might differ materially than the indices shown. Note that past performance is no guarantee of future results. Comparison to a different index might have materially different results than those shown. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell ® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. ALCAPPRESSPR-0418 Fred Alger Management, Inc. • 360 Park Avenue South, New York, NY 10010 • 800.992.3863 • www.alger.com Page 28
Definitions
Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company.
Price-Earnings ratio (P/E) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.
Price-Book ratio (P/B) is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the price of the stock by the book value per share.
Book value of an asset is the value at which the asset is carried on a balance sheet and calculated by taking the cost of an asset minus the accumulated depreciation.
Real Federal Funds rate refers to the current U.S. Federal Funds rate less inflation.
Enterprise Value/Sales is a financial ratio that compares the total value (as measured by enterprise value) of the company to its sales.
Fred Alger Management, Inc. • 360 Park Avenue South, New York, NY 10010 • 800.992.3863 • www.alger.com
Page 29
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