This week I have been updating my spreadsheet of “bellwether” shares that I use to construct an overall view of market conditions and prospective returns for the FTSE-100 from this point.
Using only one indicator is a dangerous game, not checking what the outcomes were from different points is even more dangerous – for example just because an indicator is below its long term average it does not mean something is necessarily cheap or priced for strong returns.
I use around twenty five shares that make up the FTSE-100 as a proxy and if we look at the Price to 10 Year Average Earnings Per Share (EPS), which is often viewed as good long term indicator, of these shares and then compare the levels to future 5 year annualised returns the predictive accuracy is around 53%.
This may sound pretty good but actually using the Price to Sale, Price to Book or Tobins Q is far more accurate with predictive accuracy of 77.95%, 68.76% and 80.47% respectively.
We can even take this further using a statistical model incorporating PE, PE10, PS, PBV, Market Cap, Tobins Q and yield – this combination captures lots of the components of the firms financial statements not just the earnings – and increase the accuracy for predictive returns to 91.42%! The current prospective returns for the coming 5 years based on this model are -1.63% p.a.
The document below gives lots more interesting data like this that can help investors build a picture of what they may expect in the forthcoming years; its not perfect and there will no doubt be periods of variance but history can give us a good guideline of where we are.
Update on Brown (N) Group
This is a share I looked at recently and suggested may offer value moving forward, its been a strong early start and I also read an interesting article from the Motley Fool Article regarding the firms prospects.