S&P 500 Valuation Dashboard - Update

| About: SPDR S&P (SPY)

Summary

5 key fundamental factors are calculated across sectors.

They are compared to historical averages.

It results in a value score and a quality score for each sector.

This article is part of a monthly series giving a valuation by sector of companies in the S&P 500 index (NYSEARCA:SPY). I follow some fundamental factors for every sector and compare them to historical averages, so as to create a synthetic dashboard with a Value Score (V-score) and a Quality Score (Q-score). The choice of the valuation ratios has been justified here. The Q-score uses the Return on Equity (see why here).

In this series you can find numbers that may be useful in a top-down approach. There is no individual stock analysis or recommendations. You can refine your research reading articles by industry experts here.

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 to its own historical average Avg. The difference is measured in percentage (%Hist). For example, %Hist= 10 means that the current median ratio is 10% overpriced relative to its historical average in the sector.
  • The V-score of a sector is the average of %Hist for the 4 factors, multiplied by -1, so that the higher is the better.
  • The Q-score is the difference between the current median ROE (return on equity) and its historical average.

Median values are simpler than capital-weighted averages or aggregate ratios on each sector. They are also better reference data than averages for stock-picking. Each number in the table below is the middle point of a sector data set, which can be used to separate the good elements and the bad ones for the sector and the factor. Median values are also less sensitive to outliers than averages. A note of caution: for ETF investors, the most relevant valuation ratio would be the result of an aggregate calculation, neither a median value nor a capital-weighted average of individual stock factors.

Example

The next chart shows an example: the median P/E for all S&P 500 companies (updated on the week of publication).

Click to enlarge

The latest value is compared to the average of the period to calculate %Hist.

Sector valuation table on 1/19/2015

The next table reports the median valuation ratios. For example, the P/E column gives the current median value of P/E in each sector. The next "Avg" column gives its average between January 1999 and August 2015, which is my arbitrary reference of fair valuation. The next "%Hist" column is the difference between the historical average and the current value, in percentage. So there are 3 columns relative to P/E, and also 3 for each ratio. 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

-8.15

19.05

19.18

-0.68

15.54

14.83

4.79

1.95

1.58

23.42

25.95

24.7

5.06

Cons.Disc

-6.79

18.07

18.7

-3.37

14.92

14.56

2.47

1.41

1.12

25.89

24.03

23.52

2.17

Cons.Stap

-31.97

25.76

20.48

25.78

19.54

16.27

20.10

2.44

1.54

58.44

48.53

39.28

23.55

Energy

9.04

20.36

17.8

14.38

19.53

14.38

35.81

1.22

1.94

-37.11

15.53

30.59

-49.23

Financials

-13.30

14.99

16.16

-7.24

12.29

12.38

-0.73

2.27

2.03

11.82

18.31

12.26

49.35

Healthc.

1.15

25.48

23.76

7.24

15.17

16.85

-9.97

3.21

2.93

9.56

26.61

30.04

-11.42

Industrial

-0.23

16.66

18.75

-11.15

14.65

14.52

0.90

1.3

1.24

4.84

27.29

25.66

6.35

I.T. & Tel.

12.24

21.37

27.16

-21.32

14.85

19.29

-23.02

2.83

2.72

4.04

23.76

26.02

-8.69

Materials

-5.27

19.92

19.74

0.91

14.62

14.36

1.81

1.18

1.15

2.61

31.87

27.53

15.76

Utilities

-31.58

18.08

15.21

18.87

16.02

13.15

21.83

1.71

1.11

54.05

Click to enlarge

Energy: P/FCF Avg starts in 2000 - Utilities: P/FCF not taken into account because of frequent outliers

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

-0.41

14.52

14.93

Cons.Disc.

3.59

20.93

17.34

Cons.Stap.

-3.71

20.35

24.06

Energy

-14.14

0.75

14.89

Financials

-2.38

9.93

12.31

Healthcare

-4.71

12.89

17.6

Industrials

3.13

20.08

16.95

I.T. & Tel.

1.94

15.05

13.11

Materials

4.85

18.74

13.89

Utilities

-2.25

9.1

11.35

Click to enlarge

Q-score chart

Relative momentum

The next table and chart show the return in one month of all sectors represented by their respective SPDR ETFs.

SPDR ETF

1-month return

All

SPY

-6.75%

Cons.Disc.

XLY

-8.16%

Cons.Stap.

XLP

-2.76%

Energy

XLE

-7.57%

Financials

XLF

-8.81%

Healthcare

XLV

-5.70%

Industrials

XLI

-6.81%

I.T. & Tel.

XLK

-7.48%

Materials

XLB

-10.13%

Utilities

XLU

1.88%

Click to enlarge

Interpretation

The S&P 500 looks overpriced by about 8%, with a quality factor very close to the historical average.

Since last issue's statistics (12/15):

  • The S&P 500 is down by more than 6%.
  • Overpricing has decreased by about 10%.
  • Utilities are the only sector in gain with a return of 1.88%.
  • All other sectors are down between 2.73% and 10.13%.
  • Quality is stable globally and for every sector.
  • All sectors have improved in valuation except Consumer Staples (stable) and Utilities (worsening).

The most attractive sector regarding these metrics is Technology (including Telecom). It looks underpriced and has a median ROE above the historical average. Industrials look also good, with a fair valuation and a quality factor also above the historical average. Healthcare is slightly undervalued, but has a quality below the average. For Materials and Consumer Discretionary, a good quality factor can justify at least a part of the overpricing.

The most overpriced sectors are Utilities and Consumer Staples. Energy look a bit like a value trap, with a V-score pointing to undervaluation and the worst Q-score by far. However, it doesn't apply to all sub-industries in the sector: refining companies are above the average in quality: VLO (ROE 23%), TSO (ROE 34%), MPC (ROE 30%).

If you want to stay informed of my updates on this topic and other articles, click the "Follow" tab at the top of this article.

Data: portfolio123

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.