Executive Summary

Introduction: In May 2014 we published the white papers “Bubble Trouble? Comparing the Current Markets to 1999 and 2007” and “Comparing the Small & Mid Cap Valuation Tails: Low Dispersion, Reduced Opportunities & Fundamental Fixes.” In that work, we surmised that the R2500 was in the “Value Doldrums” which indicated that the cheapest stocks would likely underperform the most expensive stocks (i.e., growth would likely outperform value). This came to fruition over the last 13 months, with the most expensive stocks soaring in value despite deteriorating fundamentals.


1) Median P/S valuation has soared 60% for the most expensive SMID decile since our earlier papers while profitability, as measured by the percentage of companies that are profitable, has deteriorated by a significant 13% points to only 35% of the companies being profitable. One could infer from the below charts that the excess returns of the most expensive decile came entirely or primarily from multiple expansion and not an improvement in fundamentals.

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