Well, not really the world-just the Russell Mid-Cap Growth Index. I took a look at valuation measures for PDP (the Powershares ETF version of the DWA Technical Leaders) versus its peer group, according to Morningstar. (Their data is as of 8/31/2012.) Morningstar’s peer group is a moving target, but right now they have PDP benchmarked against the Russell Mid-Cap Growth Index. As you would expect, most of the valuation measures are pretty similar, since Morningstar is intentionally looking for the index that PDP is most like at the moment. There is one measure, though, where PDP is massively different. See if you can guess what it is:
Source: Morningstar (click on image to enlarge)
While most measures are similar, the PDP constituents have growth in cash flow that is double the peer group. That appears to be a prized attribute at the present time and may account for part of the reason that PDP’s holdings have high relative strength.
Sometimes different attributes stand out when I’ve looked at these measures in the past. For example, one time I noted that while the valuations of the PDP holdings were roughly similar to the peer group, the earnings growth rates were significantly higher.
Looking at valuation and growth measures often surprises investors unfamiliar with relative strength. Their guess is usually that “momentum stocks” are puffed up and have lousy valuation metrics. That’s usually not the case. More often, stocks with high relative strength are simply “best in class.”
High relative strength stocks are usually strong for a reason, and that reason is usually strong fundamentals.
See www.powershares.com for more information.
