This monthly series gives fundamental scores by sector for companies in the S&P 500 index (SPY). I follow chosen fundamental factors for every sector and compare them to a historical baseline, so as to create a synthetic dashboard with a Value Score (V-score) and a Quality Score (Q-score). You can find here data that may be useful in a top-down approach.

Methodology

  • The median value of 4 valuation ratios is calculated for S&P 500 companies in each sector: Price/Earnings (P/E), Forward Price Earning for the current year (Fwd P/E), Price to sales (P/S), Price to free cash flow (P/FCF).
  • It is compared in percentage to its own historical average. For example, a difference of 10% means that the current median ratio is 10% over- or under-priced relative to its historical average in the sector.
  • The V-score of a sector is the average of differences in percentage for the 4 factors, multiplied by -1. The higher is the better.
  • The Q-score is the difference between the current median ROE (return on equity) and its historical average. The higher is the better.

The choice of the valuation and quality ratios has been justified in previous articles. Among the simple, publicly available fundamental factors, they are the best predictors of future returns according to 17-year backtests. Median values are better reference data than averages for stock-picking. Each median is the middle point of a sector, which can be used to separate good and bad elements. A median is also less sensitive to outliers.

Sector valuation table on 4/3/2017

The next table reports the 4 valuation factors. There are 3 columns for each factor: the current median value, the historical average (“Avg”) between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference in percentage (“%Hist”). The first column “V-score” shows the value score as defined above.

V-score P/E Avg %Hist Fwd P/E Avg %Hist P/S Avg %Hist P/FCF Avg %Hist
All -27.75 22.83 19.18 19.03 17.04 14.83 14.90 2.54 1.58 60.76 28.73 24.7 16.32
Cons.Disc. -12.74 19.45 18.7 4.01 14.81 14.56 1.72 1.59 1.12 41.96 24.29 23.52 3.27
Cons.Stap. -37.24 25.54 20.48 24.71 20.49 16.27 25.94 2.63 1.54 70.78 50.09 39.28 27.52
Energy -64.69 25.45 17.8 42.98 24.66 14.38 71.49 2.87 1.94 47.94 60.07 30.59 96.37
Financials -33.54 16.67 15.02 10.99 12.67 11.55 9.70 2.71 1.89 43.39 17.06 10.03 70.09
Healthcare -9.58 29.06 23.76 22.31 16.97 16.85 0.71 3.7 2.93 26.28 26.74 30.04 -10.99
Industrials -30.75 23.59 18.75 25.81 17.41 14.52 19.90 1.82 1.24 46.77 33.49 25.66 30.51
I.T. & Tel. -1.31 26.36 27.16 -2.95 16.4 19.29 -14.98 3.62 2.72 33.09 23.44 26.02 -9.92
Materials -39.42 26.54 19.74 34.45 18.8 14.36 30.92 1.86 1.15 61.74 35.95 27.53 30.58
Utilities -94.34 21.35 15.21 40.37 18.21 13.15 38.48 2.25 1.11 102.70 128.68 43.5 195.82
Real Estate -4.11 34.02 40.71 -16.43 38.26 36 6.28 8.17 6.67 22.49 53.69 51.8 3.65

Energy: P/FCF Avg starts in 2000 – Utilities: P/FCF starts in 2004 – Real Estate: Avg start in 2006

V-score chart

Sector quality table

The next table gives a score for each sector relative to its own historical average. Here, only one factor is accounted.

Q-score (Diff) Median ROE Avg
All -0.66 14.27 14.93
Cons.Disc. 4.34 21.68 17.34
Cons.Stap. -2.62 21.44 24.06
Energy -23.10 -8.21 14.89
Financials -2.54 9.99 12.53
Healthcare -2.04 15.56 17.6
Industrials 3.88 20.83 16.95
I.T. & Tel. 3.61 16.72 13.11
Materials 3.92 17.81 13.89
Utilities -1.99 9.36 11.35
Real Estate 2.41 9.24 6.83

Q-score chart

Relative momentum

The next table and chart show the return in 1 month and 1 year for all sectors, represented by their respective SPDR ETFs (including dividends).

All

SPY

-0.63%

16.28%

Cons.Disc.

XLY

1.24%

12.54%

Cons.Stap.

XLP

-0.87%

4.35%

Energy

XLE

-2.50%

17.24%

Financials

XLF

-4.17%

31.18%

Healthcare

XLV

-1.15%

10.21%

Industrials

XLI

-1.35%

19.29%

I.T. & Tel.

XLK

1.47%

21.34%

Materials

XLB

-0.24%

18.17%

Utilities

XLU

0.04%

6.56%

Real Estate

XLRE

-0.50%

1.85%

Interpretation

S&P 500 companies as a group look overpriced by almost 28%, with a quality factor close to the historical average.

Since last month:

  • The S&P 500 went down -0.6% in one month.
  • The V-score has deteriorated by 2.8%.
  • The only sectors in gain are Consumer Discretionary and Technology (incl. Telecom).
  • The laggards are Financials and Energy.
  • V-score has improved for Materials, Energy, Financials, Real Estate, is stable for Consumer Staples and Industrials, and deteriorated in other sectors.
  • Q-score has improved a bit in Healthcare, deteriorated in Industrials, Real Estate, and is stable elsewhere.

Technology and Real estate are very close to fair value regarding my metrics, and better than their historical averages in quality (measured by ROE). Healthcare and Consumer Discretionary are reasonably overpriced. Consumer Discretionary is above the baseline in quality. Other sectors look overpriced by more than 30%. The most overvalued sector seems to be Utilities, but the worst combination of valuation and quality is Energy, with a note of caution: it is strongly dependent on oil price, whose variations impact fundamental factors with a delay of one quarter and more. Industrials and Materials are above the baseline in quality.

In the next days I will publish top-down articles with data in all industries and a list of stocks to consider in every sector. All the lists together have returned about 25% in 2016. If you want to stay informed of updates on this topic, click “Follow” at the top of this page. My Marketplace Subscribers have an early access to the stock lists before they are published in free-access articles.

Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).

Disclosure: I am/we are long SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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