What is the value of a public company’s share? The obvious answer is the price that any given buyer is willing to pay for it. The more financially inclined will tell you that a share of stock is a claim on the company’s future earnings. Thus, following this logic, the value of an index of public company stocks, in our case B400, is also a claim on the aggregate future earnings of the index’s components.

Future earnings are, of course, in the future and, by definition, unknown. Yet we have a good idea of what they will be based on past performance, recent results, company guidance and, of course, analyst estimates. Today, by their collective reckoning, B400 trades at 21 times what its underlying components are expected to earn in the next 12 months. Fair enough, since we have established in earlier newsletters how effective B400 is at capturing GARP (Growth at a Reasonable Price). So, yes, it’s a little more expensive than market benchmarks such as the S&P 500, which is now trading somewhere near 16 times next year’s earnings. However, B400 companies, we have also established, also grow at a much faster rate than those in widely followed benchmarks, at least in the aggregate (for more on this see B400’s Diary). It does so, very importantly, without sacrificing profits and always with an eye for quality thanks to MarketGrader’s fundamental analysis methodology. This, perhaps, helps explain why the index has done so well historically and it is also why other measures of “value” come in handy to better understand the index.

How Much Is B400 Worth?

The simplest answer to this question would be the combined market capitalization of all its components: $7.4 trillion (yes, with a “t”). A definition perhaps more acceptable to financial accountants would be $2.15 trillion, which is the aggregate common equity of all B400 components. Based on these two values, then, we could conclude that investors are willing to pay 3.4 times B400’s net worth for tomorrow’s earnings; this could also be another definition of “value.” For an index whose underlying components have, on average, grown their operating income by almost 390% in the last three years, that seems like a good deal.

Investment purists might prefer to look at B400’s trailing P/E: 22.8. This is surprisingly close to the forward P/E of 21, suggesting investors are paying today almost as much for yesterday’s earnings as they are for tomorrow’s, for an index with an average three-year EPS growth rate of 31% (GARP, remember?) Price to book value is another way to look at this question. In B400’s case it’s 6.4 times.

Santa Would Be Jealous

All of this excludes the “cash question” of how much investors really are paying for tomorrow’s earnings once a company’s cash is excluded from its market value. For those who think B400 might not be as rich as much larger benchmarks, at least from a cash perspective, think again. B400 companies hold, today, an aggregate $751 billion in cash and equivalents. Yes, this sum includes cash-rich companies we all know about such as Apple, Google and Microsoft but the overall bounty is nicely spread across almost all components. On average, B400 companies have $1.9 billion in cash a piece, or the equivalent of 35% of their individual common equity. Think about this: investors who own B400 shares are, from this perspective, paying only 65% of the value of the index for future earnings and 35% for cold, hard cash sitting in the bank. Not bad. Back all of this cash out of the index’s aggregate market value and we arrive at an overall trailing P/E ratio of 15 times trailing earnings.

Another good way of putting this cash into context is this: B400 companies have 1.2 times as much cash as what they collectively booked in the last 12 months in operating income—in our opinion the best gauge of earnings power. Their cash pile is also 1.7 times their trailing 12-month net income and 10% of their aggregate market capitalization. Put another way, at their current earnings rate, B400 companies could double their current cash pile to over $1.5 trillion in 21 months, assuming they would hoard all of it and not pay out any to shareholders. That’s what we would call earnings power and more than enough to make Santa blush.

Frankly we would need a few more pages to complete all 50 shades of value but we hope our readers get our point with just the few examples mentioned above. B400—and in fact corporate America—are not only in very good shape financially but, depending on how you define “value,” far from being the overextended bubble many pundits would lead you to believe.

Below we have included a list of the 30 B400 components with the most cash on hand per share as well as their trailing P/E with and without cash.