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Video- Sector Shiller P/E: Which Sectors Are Better Positioned for Higher Returns

Charlie Tian delves into the valuation of individual sectors

March 27, 2020

Hi fellow investors,

This is Charlie Tian again. In my previous video, I mentioned that the Shiller P/E can be used to measure the overall market valuation. It is a better measure of market valuation than the regular price-earnings ratio. On top of being applied to the overall market, it can also be applied to different sectors.

On GuruFocus.com, we calculate the Shiller P/E for different sectors in the same way as the overall market. We normalize the earnings of the last 10 years and then divide by the market index for that sector. You can see that currently, energy is the cheapest according to the Shiller P/E.

In this instance, the regular P/E also shows that real estate is not very expensive, but the Shiller P/E shows us that it actually is very expensive. In this case, the Shiller P/E gives a more accurate view of valuation.

We also have the data for these sectors for the last 10 years. An interesting one to look at is utilities. On our charts, the blue line represents the Shiller P/E while the green line represents the regular P/E. After expanding the data a bit, you can see that the regular P/E shows utilities are cheap at around 16. The Shiller P/E tells us that it is actually about 22, so it is not that cheap.

I believe in this case that the Shiller P/E is a better indication of the valuation in this sector. In my next video, I will look at using the Shiller P/E for individual stocks, so stay tuned. If you have any questions, please leave them in the comments section below and I will answer them as soon as possible.

See you next time,

Charlie Tian

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About the author:

Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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