High Valuations and High Compensation in the Russell 2000

The top 10 Russell 2000 companies had a combined market capitalization of $66.1 billion, produce pre-stock compensation after tax profit of $815.8 million of which they paid out $357.5 mil in stock compensation (44%). The median stock compensation of the top 10 was 32.0% and trade at a price-to-earnings multiple of 144x. This is a very high valuation and not our cup of tea. The following charts are a median comparison of the top 10 stocks of the Russell 2000 versus First Wilshire’s portfolio. The top 10 First Wilshire stocks have a median stock compensation payout of only 9.3% and trade at a P/E of 13.9. This goes some way to illustrating the favoritism of investors to growth stocks and why we believe our portfolio is better positioned for future performance. Of course, valuations have been similar for years now so mispricing can obviously last longer than expected and often longer than investors can hold tight. These figures should also at least serve as a warning to investors in the major index funds and index ETFs.

Source: Reuters/Eikon data. Figures represent stock compensation as a percentage of after tax net profit plus stock compensation.

Source: Reuters/Eikon data. Figures represent total market capitalization divided by total after tax net profit.

We’d also like to note that, it is not healthy for our country to continue to overly reward companies that do not produce the critical things we all need. Food producers, agriculture, utilities, construction, chemicals, banking and other very basic and critical industries are almost demonized in favor of companies that produce far less critical output and services while employing very few people for their size. This is especially true in the U.S. If you are a company that employs many people in the U.S., watch out, you will likely be shunned by investors. Meanwhile, companies that outsource everything they can to other countries, including their taxable profits are valued highly and lauded for their corporate governance. It is not that they are actually better corporate citizens, they just happen to have a business model that saves them from having to get their hands dirty in the real world.

The following is for informational purposes only.  All statistical information has been obtained from publicly available sources.  However, FWSM has not independently verified any of the statistical information included in the report.  This information is not intended to be a solicitation or recommendation of any security.

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