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Summary

  • Our monthly report of relative sector valuations finds Utilities and Financial Services to be the most attractively valued and Healthcare and Technology to be the most overvalued ones.
  • In June, the number of Financial Services firms screening as attractive jumped, likely due to improving results in the U.S. regional bank industry.
  • Biotech companies still screen as materially overvalued, but there are signs that momentum is starting to break in the Tech sector, especially among application software firms.

Bullish Sector: Financial Services

Market capitalization and relative valuation statistics for the Financial Services2 sector at the start of June were as follows.

Industry

Aggregate Market Cap3

No. of Companies

No. of VS10 Companies4

No. of VS1 Companies

Bull/Bear Score5

Banks - Global

1,917,873

19

10

-

53%

Banks - Regional - Latin America

234,314

13

6

-

46%

Asset Management

400,759

74

29

1

38%

Insurance - Reinsurance

40,735

10

3

-

30%

Specialty Finance

42,268

21

7

1

29%

Insurance - Property & Casualty

248,238

47

13

-

28%

Insurance - Diversified

517,020

15

4

-

27%

Credit Services

456,466

33

8

-

24%

Banks - Regional - U.S.

453,480

230

49

-

21%

Insurance - Specialty

28,147

10

2

-

20%

Savings & Cooperative Banks

39,839

46

9

1

17%

Insurance - Life

296,170

22

1

-

5%

Banks - Regional - Asia

107,867

5

-

-

0%

Banks - Regional - Europe

135,162

2

-

-

0%

Capital Markets

254,995

25

-

-

0%

Financial Exchanges

58,202

5

-

-

0%

Insurance Brokers

79,995

11

-

2

-18%

Total

5,311,530

588

141

5

23%

Represented as a heatmap1 (size of box represents aggregate market capitalization, color of the box represents Bull/Bear Score) the industries within the Financial Services sector appear as follows:

(click to enlarge)

For more information and to learn about the methodology used to create these reports, please feel free to download our full June report, which includes a detailed methodology section (email registration required).

The first thing to catch our attention when we crunched the numbers this month was the large increase in the number of Financial Services companies screening as undervalued compared to last month. This appears very clearly in a graph showing the number of VS10 companies by sector over time.

(click to enlarge)

At the start of May, 102 Financial Services firms screened as VS10; at the start of June, this figure increased to 141 firms-a material increase of nearly 40%. Utilities and Energy also saw similar jumps when viewed in terms of VS10s as a percent of total firms in the sector. However, because the Financial Services sector has more component firms than either of the above-mentioned, the jump seems all the more startling.

Looking closer, we noticed that the biggest month-over-month winner for VS10 count was the U.S. Regional Bank industry. 49 regional banks are now screening as attractive, whereas only 17 did last month-by far the biggest single industry change.

The price of the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) was flat for the month of May, implying that the greater number of VS10s this month from last are likely due mainly to operational improvements (e.g., better TTM earnings and cash flow). Our hypothesis is that better quarterly earnings at regional banks have not been fully priced into the market yet, leading to what may be an attractive investment opportunity.

Non-subscribers to YCharts Pro service who would like this list are encouraged to contact the report's author.

Bearish Sector: Technology

The second thing to catch our attention while perusing the data was the fact that the Bull/Bear Score for the Technology sector had improved by a material amount-eight percentage points-in the space of just one month. In tabular format, the industry breakdown for the Tech sector statistics appears as below:

Industry

Aggregate Mkt Cap

No. of Companies

No. of VS10 Companies

No. of VS1 Companies

Bull/Bear Score5

Software - Application

409,079

116

-

44

-38%

Semiconductor Memory

33,129

3

-

1

-33%

Internet Content & Information

755,137

40

-

12

-30%

Software - Infrastructure

634,342

23

-

6

-26%

Computer Systems

87,348

16

1

5

-25%

Communication Equipment

431,104

50

-

12

-24%

Semiconductor Equipment & Mat'ls

123,308

34

-

7

-21%

Semiconductors

568,156

75

1

13

-16%

Solar

18,829

7

-

1

-14%

Health Information Services

31,830

9

-

1

-11%

Data Storage

139,689

11

-

1

-9%

Electronic Components

93,539

30

1

3

-7%

Information Technology Services

459,877

36

1

3

-6%

Computer Distribution

9,757

5

-

-

0%

Consumer Electronics

638,281

12

-

-

0%

Contract Manufacturers

16,358

9

-

-

0%

Electronic Gaming & Multimedia

39,028

11

1

1

0%

Electronics Distribution

17,661

6

-

-

0%

Scientific & Technical Instruments

58,350

28

-

-

0%

Total

4,564,801

521

5

110

-20%

In heatmap form, we can clearly see relative levels of valuation according to our Value Score metric.

(click to enlarge)

Having seen Groupon (NASDAQ:GRPN) lose a fifth of its value in a single day, and knowing that other momentum stocks had also been hit hard, we assumed that the tide was finally turning for the frothy Tech sector. However, as we dug deeper, we realized that the story was more complex.

For example, the application software industry was a group in particular to show a significant change in stocks screening as VS1 from May to June. No less than 21 application software stocks that had been in May's VS1 list dropped out when we screened this month. However, just over one-third of these stocks left the VS1 group due to improvements in operational performance reported in May rather than to stock price drops.

What's more, the stocks that moved out of VS1 territory due operational improvements tended to be the most important, largest capitalization ones such as Adobe (NASDAQ:ADBE) (VS2) and Autodesk (NASDAQ:ADSK) (VS2). The stocks that suffered the largest drops were less important companies such as Interactive Intelligence (NASDAQ:ININ) (-20.3% during May) and NQ Mobile (NYSE:NQ) (-38.3% during May).

Investors looking for bearish Tech exposure still have plenty from which to choose. LinkedIn (NYSE:LNKD), Workday (NYSE:WDAY), and Electronic Arts (NASDAQ:EA) are all well-known Tech firms trading in VS1 territory again this month. And Groupon? Even after losing a fifth of its value, its poor operational performance means that it is still screening as a VS1 stock at the start of June.

_____________________

NOTES:

1. The YCharts 10% Sector Report is designed to do three things:

a. Show the relative valuation of all U.S. market sectors at the start of each month,

b. Highlight the most and least attractive industries in the most over- and under-valued sectors,

c. Provide a summary of notable stocks in both the VS10 and VS1 deciles (see Note 4 for an explanation of the deciles)

2. We use Morningstar sector classifications.

3. Our market cap figure includes the companies of large capitalization foreign stocks that are listed on U.S. Exchanges. These companies are excluded from the S&P 500, the U.S. Russell Indices, and the Wilshire Index, so the aggregate market capitalizations for these indices are materially less than the total listed here.

4. The Value Score is a quantitative six-factor model designed to separate companies according to their relative (rather than absolute) valuation; companies with a Value Score of 10 ("VS10"-the most undervalued decile) have historically performed much better than the S&P 500 index, and those with a Value Score of 1 ("VS1") have historically performed worse. YCharts Value Scores are calculated for all stocks within the YCharts data universe that have a market cap above 100M and share price greater than $5. We further limit the universe for the purposes of this report. As such, even though the Value Score framework is based on equally-sized deciles, the total number of VS10 stocks may not equal the total number of VS1 stocks.

5. The formula we use is:

Bull/Bear Score

=

No. of VS10 Companies in a group - No. of VS1 Companies in a group

Total Number of Companies in a group

This is meant to identify groups (i.e., sectors or industries) that have a large absolute difference between overvalued and undervalued firms regardless of the component firms' market capitalization weighting.

Source: U.S. Regional Banks' Attractiveness Jumps In June