Alphabet has never been this much cheaper than the S&P 500

Search engine giant Alphabet has never been this cheap compared to the S&P 500, based on one popular valuation metric.

The forward price to earnings ratio — that is, its price divided by the earnings per share figures that analysts expect it to deliver in 12 months’ time — for the stock is currently near 17.5x versus about 20.8 for the S&P 500 as a whole. That more than three point discount is the largest for the stock compared to the benchmark index is the largest on record (going back to 2005).

Now, a lot of Alphabet’s (relative) cheapness is down to how pricey many of the top constituents in the market are. It’s still slightly more expensive than the average stock.

For most people I think it is a waste of time (and usually money!) to hold anything other than a broad portfolio of (mostly index) ETFs that you add to over time as your financial situation allows.

Throughout its history, Alphabet has tended to grow earnings at a much faster clip than the S&P 500 as a whole, and earnings growth is the #1 fuel behind a company’s long-term success in the stock market.

Disclosure: I made this chart and then immediately bought shares of Alphabet. This seems to be one of those “growth at a reasonable price” opportunities, at least to me. Getting to pay a cheaper price for (usually) better earnings growth sounds good to me. I can only hope it works out as well as this did.