I was tinkering around in my spare time (I need to get out more) building some spreadsheets which encapsulated several data points for every stock in the S&P 500 since January 1. What I found was interesting and a bit surprising as to what characteristics the best stocks had.Valuations were not connected to returns in this time frame.
Out of the 500 stocks that make up the venerable index, 20 of them have a year-to-date return greater than 30%, which is quite impressive in a year where the index is negative and so many macro problems plague us. If one would have asked me what attributes they would have I would have said low valuations and defensive in nature.I think maybe one or two out of the 20 have those traits.
P/E?
16 out of the 20 stocks had forward p/e’s that were higher than the broader market. 11, or more than half, had p/e’s greater than 20. This was the most shocking to me because in brutal markets, highly-valued stocks tend to take the biggest hits. These stocks don’t get much cheaper on a price/sales basis.14 out of the 20 had p/s ratios above 2, which is about what the market is trading at.
My key takeaway from looking at this is that valuations don’t have much of an impact on short-term trading or returns. This is a huge statement because a lot of traders and short-termers frequently cite valuation for getting into a position or even shorting. Shorting on valuation can be an extremely dangerous endeavor as can averaging down endlessly into a falling stock that seems cheap. The market has other ideas as to what is cheap and what isn’t.
Another important takeaway is to abandon what you feel the market should be paying attention to. This is especially true for traders because that kind of pride will cost you some serious money. Now long term investors should certainly focus more on valuations as they matter more on a longer time frame, but when you are talking months and even a couple years, valuation just might not be as important as you think.
Interesting Observations About YTD S&P 500 Returns is an article from: 
