Largest Cap Techs Undervalued, Consumer Goods And Utilities Large Caps Stretching Market Valuations

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 |  Includes: XLB, XLF, XLI, XLK, XLP, XLU, XLV, XLY
by: Intrepid Investor

Summary

SPDR ETFs can be used as a broad guide to stock performance by sector and may be tracked on Google.com/finance. Technology sector ETF (XLK) has by far the highest P/E.

FAST Graphs is a stock research tool that provides a 2-dimensional fair value reference for a stock's price based on current, historical and projected earnings.

FAST Graphs 2-D snapshots show technology large caps to be the most undervalued, consumer goods and utilities are most overvalued.

SPDR ETFs can be used as a broad guide to stock performance by sector. Individual stock pickers myself included who want some diversification across sectors may time a stock pick according to its sector's current valuations. The P/E ratio of 34 for the technology sector (NYSEARCA:XLK) is currently well above the P/E for the other sectors and the market average.

(source: Google.com/finance):

Sector

P/E

XLK (Technology)

34.13

XLU (Utilities)

11.09

XLP (Staple)

10.68

XLE (Energy)

9.42

XLB (Basic Materials)

6.58

XLY (Discretionary)

6.33

XLF (Financial)

5.87

XLI (Industrial)

5.69

XLV (Healthcare)

5.55

Click to enlarge

FAST Graphs is a stock research tool that provides a 2-dimensional reference for a stock price: the vertical dimension provides an earnings-justified, market-average price, the horizontal dimension is comprised of historical and future (2-year) earnings-justified prices. FAST Graphs thus provides more than the snapshot that a simple P/E ratio provides. A caveat is that the horizontal dimension of time can be adjusted between 2 and 21 years, and the determination of under- or overvaluation sometimes depends on the length of time chosen to construct the FAST Graph. I used the default of 15 years for the analyses of each sector's 5 largest cap companies. For companies with less than 15 years of data available, I used the longest time span available on the FAST Graph. Earnings-justified price is referred to as fair value abbreviated FV.

The technology sector's five largest caps are Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google (GOOGL, GOOG excluded), Facebook (NASDAQ:FB), and IBM (NYSE:IBM). Stock prices, market caps, fair values for years' end 2013 and 2014, and prices as a percent of fair values are in the following table. All except MSFT are undervalued, and the median undervaluation for these largest 5 is 12% for using FV for 2013 year's end, 27% for 2014 year's end.

Technology Stock

Market Cap ($B)

Price 31JUL14

FV Yr end 2013

FV Yr end 2014

Price as % FV
2013

Price as % FV
2014

AAPL

$567

$95.60

$165.33

$184.00

58%

52%

MSFT

$356

$43.16

$39.45

$41.85

109%

103%

GOOGL

$195

$580

$655

$789.20

88%

73%

FB

$192

$73.06

$49.42

$90.98

148%

80%

IBM

$190

$191.67

$254.83

$268.33

75%

71%

Median

$195

88%

73%

Click to enlarge

Thus, the 5 largest caps in technology are undervalued, not overvalued as suggested by the snapshot P/E of 34 for the technology ETF.

The sector ETF with the second highest P/E of 11 is Utilities (NYSEARCA:XLU). This low-to-negative growth sector has valuations that are stretched by 26% vs. 2013 and 18% vs. 2014 fair values.

Utilities Stock

Market Cap ($B)

Price 31JUL14

FV Yr-end 2013

FV Yr end 2014

Price
% FV 2013

Price
%FV
2014

DUK

$51

$72.13

$51.48

$54.21

140%

133%

NEE

$42

$93.89

$74.55

$79.64

126%

118%

DD

$40

$68

$49

$52.65

139%

128%

SO

$39

$43.29

$41.11

$41.85

105%

103%

EXC

$28

$31.08

$37.50

$35.70

83%

87%

Median

$40

126%

118%

Click to enlarge

FAST Graphs provides a beautiful pictorial of what Duke Energy (NYSE:DUK) provides its depositors: dividend (the pale blue band) of 4.4% but flat line growth at a P/E of 16.

Healthcare (NYSEARCA:XLV) has the lowest P/E of 5.5. The following table paints a mixed picture for valuations of the largest caps in healthcare.

Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), Merck (NYSE:MRK), Gilead (NASDAQ:GILD) and Amgen (NASDAQ:AMGN):

Healthcare Stock

Market Cap ($B)

Price 31JUL14

FV Yr end 2013

FV Yr end 2014

Price
% FV 2013

Price as % FV 2014

JNJ

$285

$100.09

$82.79

$88.64

121%

113%

PFE

$180

$28.70

$33.30

$33.75

86%

85%

MRK

$163

$57

$52

$52.50

108%

108%

GILD

$140

$91.55

$87.54

$343.29

105%

27%

AMGN

$96

$127.39

$114.08

$125.69

112%

101%

Median

$163

108%

101%

Click to enlarge

JNJ, MRK and AMGN are fairly-to-slightly overvalued, while PFE is 15% under fair value, and GILD is undervalued by a whopping 73%.

In the consumer discretionary, the largest cap companies are overvalued by 40% vs, 2013 fair value and 20% for the 2014 estimate. The values are shown in this table for:

Disney (NYSE:DIS), Amazon (NASDAQ:AMZN), Comcast (NASDAQ:CMCSA) (not CMCSK), Home Depot (NYSE:HD) and McDonald's (NYSE:MCD):

Discretionary
Stock

Market Cap ($B)

Price 31JUL14

FV yr end 2013

FV yr end 2014

Price %FV 2013

Price % FV 2014

DIS

$149

$85.88

$63.60

$69.60

135%

123%

AMZN

$146

$312.99

$6.98

$0.00

4484%

n/a

CMCSA

$115

$53.73

$38.29

$45.57

140%

118%

HD

$113

$80.85

$56.40

$66.15

143%

122%

MCD

$92

$94.56

$83.24

$84.14

114%

112%

Median

$115

140%

120%

Click to enlarge

Consumer staples' largest caps are in the following table:

Wal-Mart (NYSE:WMT), Proctor & Gamble (NYSE:PG), Coke (NYSE:KO), Pepsi (NYSE:PEP), and Phillip Morris (NYSE:PM):

Stock

Market Cap ($B)

Price 31JUL14

FV yr end 2013

FV yr end 2014

Price as % FV 2013

Price % FV 2014

WMT

$241

$73.58

$78.69

$77.24

94%

95%

PG

$219

$80.95

$63.30

$66.75

128%

121%

KO

$173

$39.29

$31.20

$31.20

126%

126%

PEP

$136

$88.10

$66.55

$68.70

132%

128%

PM

$131

$82.01

$80.99

$77.69

101%

106%

Median

$173

126%

121%

Click to enlarge

Basic Materials' (NYSEARCA:XLB) 5 largest caps are Dow (NYSE:DOW), Monsanto (NYSE:MON), Du Pont (NYSE:DD), LyondellBasell (NYSE:LYB) and Freeport-McMoRan (NYSE:FCX):

Basic Materials Stock

Market Cap ($B)

Price 31JUL14

FV Yr end 2013

FV Yr end 2014

Recent Price as % FV Recent Q

Recent Price as % FV Next Q

DOW

$62

$51.07

$37.20

$44.25

137%

115%

MON

$61

$113.09

$68.40

$77.99

165%

145%

DD

$60

$64

$58

$60.30

110%

107%

LYB

$56

$106.25

$226.49

$268.62

47%

40%

FCX

$38

$37.22

$56.22

$53.29

66%

70%

Median

$60

110%

107%

Click to enlarge

Here I note that LYB was evaluated on FAST Graphs with a shorter timeline (2010-2015) than the others (2001-2015).

The five largest cap energy stocks are:

Exxon (NYSE:XOM), Chevron (NYSE:CVX), Schlumberger (NYSE:SLB), ConocoPhillips (NYSCOP) and Occidental (NYSE:OXY):

Energy Stock

Market Cap ($B)

Price 31JUL14

FV Yr end 2013

FV Yr end 2014

Price % FV 2013

Price % FV 2014

XOM

$425

$98.94

$110.54

$118.19

90%

84%

CVX

$243

$129.24

$166.34

$162.44

78%

80%

SLB

$141

$108.39

$76.18

$91.57

142%

118%

COP

$100

$82.50

$85.49

$98.24

97%

84%

OXY

$78

$97.71

$104.24

$109.74

94%

89%

Median

$141

94%

84%

Click to enlarge

The financial sector's largest caps are Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM), Berkshire A (NYSE:BRK.A) (NYSE:BRK.B), Bank of America (NYSE:BAC), and Citigroup (NYSE:C):

Financial Stock

Market Cap ($B)

Price 31JUL14

FV Yr end 2013

FV Yr end 2014

Price % FV 2013

Price% FV 2014

WFC

$261

$50.90

$58.35

$61.65

87%

83%

JPM

$212

$56.34

$85.49

$83.09

66%

68%

BRK/A

$164

$189,900

$177,900

$193,754.00

107%

98%

BAC

$160

$15.25

$11.13

$10.42

137%

146%

C

$147

$48.91

$52.11

$55.74

94%

88%

Median

$164

94%

88%

Click to enlarge

Conclusion. It might be different if an analysis of more stocks at different market caps were performed, but I think it is fair to say that the flight to safety has been pushing up valuations on consumer staples and utilities which makes these sectors seem like danger zones to me. Technology looks like the best sector to find a large cap with GARP. All those SA readers bullish on AAPL already know that.

Disclosure: The author is long MSFT, GILD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.