Friday, December 15, 2006

Investing in 2007 - part V

In the previous article, we looked at REITs and large cap growth segments. We found the REITs to be somewhat overpriced compared to the earning yield and P/E ratios. The large cap growth segment has some potential to do well in 2007.

In this article, we will look at two other segments, large cap value and large cap blend categories. Again, we will use Vanguard funds as the examples as we have more information about the funds and vanguard funds are one of the most widely held funds.

As noted in the first part of this series, the two vanguard funds in the value and blend category are VTV and VV respectively.

The outlook for VTV is as follows. As of 11/30/2006, VTV had a P/E of 14.2 with a price to book ratio of 2.2, ROE of 18.2% and growth rate of 16%. The growth rate denotes the earnings growth for the past five years. The ETF had about 400 stocks in its core holdings. The top holdings of this group are as follows.

XOM - Exon Mobil Corp has a P/E of 12
GE - General Electric Company has a P/E of 22
C - Citigroup Inc has a P/E of 11.4
BAC - Bank of America has a P/E of 12.2
PSE - Pfizer Inc has a P/E of 14.8
MO - Altria Group has a P/E of 12
JPM - JP Morgan and Chase has a P/E of 13.6
CVX - Chevron has a P/E of 9.6
AIG - American International Group has a P/E of 17.11
T - AT&T has a P/E of 19.4

The top ten holdings accounted for ~30% of the funds portfolio. This sector looks good and can potentially rake in decent returns in 2007. The energy sector is a wild card but the share holder friendly moves by cash rich management should help.

The profile of VV is as follows. This fund holds about 790 stocks. As of 11/30/2006, this fund had a median market cap of 45.6 billion, P/E of 17.1, Price to book ratio of 2.9, ROE of 18.7% and earning growth rate of 19.1%. The earnings growth rate denotes the growth rate for the past five years. Let us look at the top holdings in the ETF as these comprise 18.2% of total net assets.

XOM Exon Mobil has a P/E 12 and market cap of 450 billion
GE General Electric has a P/E of 22 and a market cap of 385 billion
MSFT Microsoft has a P/E of 24 and a market cap of 295 billion
C Citibank has a P/E of 11.6 and a market cap of 265 billion
BAC Bank of America has a P/E of 12 and a market cap of 235 billion
PFE Pfizer has a P/E of 14.88 and a market cap of 184.88 billion
PG Proctor and Gamble has a P/E of 23.8 and a market cap of 203 billion
JNJ Johnson and Johnson has P/E of 17 and a market cap of 192 billion
MO Altria Group has a P/E of 15.78 and a market cap of 178.6 billion
CSCO Cisco has a P/E of 29 and a market cap of 167 billion

In the value category to the blend category and their top ten holdings, both have some of the same stocks. The interest is in the differences, the blend has Microsoft, JNJ and Cisco and other stocks in different composition levels. Microsoft is expected to do well in 2007 as is JNJ. Cisco is on a tear currently and may not be considered as cheap. The value segment has Chevron, JP Morgan and AT&T. The telecom sector has been hot this year and both oil and banking have had record years. This performance may be hard to beat in 2007.


I like the value and blend segments to the growth ETF we discussed in the earlier article. The growth ETF has more potential but is also priced higher. Again, the time to buy these securities is when the market is down and when the valuations are more attractive. Currently the market is going up, a situation that may not reverse itself till well into the new year.

Next article:

In the next article in this series, we will look at the domestic small cap segment and go into the details of that sector.

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