Valuation Dashboard: Consumer Discretionary - Update

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Includes: AN, BIG, CBS, DAN, DG, DLTR, FOSL, GT, IPG, MAT, MCD, OMC, OUTR, SPY, TGNA, VIAB, XLY
by: Fred Piard

Summary

Four key fundamental factors are reported across industries in the Consumer Discretionary sector.

They give a valuation status relative to history.

They give a reference for picking stocks in each industry.

This monthly series of articles provides a valuation dashboard in sectors and industries. I follow up a certain number of fundamental factors and compare them to historical averages. This article covers Consumer Discretionary. The choice of the fundamental ratios used in this study has been justified here and here. You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A list of stocks to consider is provided in the conclusion.

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Methodology

  • Four industry factors calculated by portfolio123 are extracted from the database: Price/earnings (P/E),price to sales (P/S), price to free cash flow (P/FCF), return on equity (ROE).
  • They are compared with their own historical averages "Avg." The difference is measured in percentage for valuation ratios and in absolute for ROE, and named "D-xxx" if xxx is the factor's name. For example, D-P/E = (AvgP/E - P/E)/AvgP/E. It can be interpreted as a percentage in under-pricing relative to a historical baseline: the higher, the better. It points to over-pricing when negative. ROE is already a percentage. That's why we take the simple difference: D-ROE = ROE - AvgROE.

The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors.

Industry valuation table on 1/26/2016

The next table reports the four industry factors. For each factor, the next "Avg" column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next "D-xxx" column is the difference as explained above. So there are three columns for each ratio.

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Auto Components

12.34

15.33

19.50%

0.68

0.62

-9.68%

21.68

21.23

-2.12%

8.13

3.9

4.23

Automobiles

11.83

17.67

33.05%

0.86

1.06

18.87%

14.85

21.97

32.41%

17.17

0.21

16.96

Household Durables

14.11

15.46

8.73%

0.71

0.59

-20.34%

22.54

16.33

-38.03%

9.4

5.3

4.1

Leisure Equip.&Products

20.88

17.82

-17.17%

1.08

0.84

-28.57%

29.75

22.05

-34.92%

9.23

2.63

6.6

Textile,Apparel,Luxury

16.02

16.34

1.96%

0.9

0.71

-26.76%

24.55

17.23

-42.48%

12.14

7

5.14

Hotels, Restaurants, Leisure

24.03

21.67

-10.89%

1.25

1.04

-20.19%

26.06

24.18

-7.78%

9.52

4.51

5.01

Div. Consumer Services*

21.5

21.49

-0.05%

1.17

1.4

16.43%

16.13

18.64

13.47%

1.4

11.35

-9.95

Media

18.49

23.31

20.68%

1.38

1.55

10.97%

20.56

19.9

-3.32%

3.77

-3.45

7.22

Distributors

16.95

14.32

-18.37%

0.78

0.48

-62.50%

22.96

16.28

-41.03%

10.17

3.18

6.99

Internet&Catalog Retail

32.61

37.37

12.74%

1.33

1.8

26.11%

42.85

32.11

-33.45%

5.54

-14.7

20.24

Multiline Retail

18.78

19.41

3.25%

0.43

0.48

10.42%

23.17

26.81

13.58%

6.93

10.44

-3.51

Specialty Retail

15.99

17.95

10.92%

0.51

0.56

8.93%

21.61

21.87

1.19%

12.37

9.85

2.52

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*Averages since 2005

Valuation

The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better.

Price/Earnings:

Price/Sales:

Price/Free Cash Flow:

Quality (ROE)

Relative Momentum

The next chart compares the price action of the SPDR Select Sector ETF (XLY) with SPY (chart from freestockcharts.com).

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Conclusion

XLY has stayed close to SPY in the last three months. The five S&P 500 consumer discretionary stocks with the best 3-month momentum are CBS Corp (NYSE:CBS), Dollar General Corp (NYSE:DG), Dollar Tree Inc (NASDAQ:DLTR), McDonald's Corp (NYSE:MCD) and Mattel Inc. (NASDAQ:MAT). MCD hit an all-time high in January.

Since last month, valuation factors have improved because of price action for all industries except Multiline Retail (stable). Quality factors have not changed a lot. The automobile industry continues to improve in quality. Automobiles and specialty retail look the most attractive, with all factors better than their historical averages. Internet and catalog retail is far above its baseline in quality, with mixed valuation ratios. Distributors and leisure equipment are the most overpriced industries in the sector, for a quality factor only a few points above the historical average.

There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. The next table shows a list of stocks in the Consumer Discretionary sector. They are all cheaper than their respective industry for the three valuation factors simultaneously: Price/earnings, price/sales, price/free cash flow. Then they are selected for their higher return on equity. This screen updated and rebalanced monthly has an annualized return about 12.51%. The sector ETF XLY has an annualized return of 8.21% on the same period. Past performance, real or simulated, is not a guarantee of future returns. To avoid large drawdowns shown by historical data, this list may be considered an entry point for further due diligence or as a portfolio after adding a few trading rules and market timing. This is not investment advice. Do your own research before buying.

AN

AutoNation Inc

RETAILSPECIAL

BIG

Big Lots Inc

STORE

DAN

Dana Holding Corp

AUTOCOMPONENT

FOSL

Fossil Group Inc

WEARABLE

GT

Goodyear Tire & Rubber Co

AUTOCOMPONENT

IPG

Interpublic Group of Companies Inc.

MEDIA

OMC

Omnicom Group Inc.

MEDIA

OUTR

Outerwall Inc

RETAILSPECIAL

TGNA

TEGNA Inc

MEDIA

VIAB

Viacom Inc

MEDIA

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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.