Valuation Dashboard: Consumer Discretionary - Update

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Includes: BIG, COH, DAN, DLTR, F, FOSL, GME, IPG, KORS, MAT, OMC, OUTR, ROST, SPY, STRA, VIAB, XLY
by: Fred Piard

Summary

4 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.

Methodology

  • Four industry factors are calculated: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). 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.
  • They are compared with their own historical averages. The difference is measured in percentage for valuation ratios and in absolute for ROE. For valuation factors it can be interpreted as a percentage in under-pricing relative to a historical baseline. It points to over-pricing when negative. In all cases, including ROE, the higher the better.

Industry valuation table on 2/16/2016

The next table reports the 4 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 3 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

12.72

15.33

17.03%

0.66

0.62

-6.45%

23.02

21.23

-8.43%

7.44

3.9

3.54

Automobiles

11.97

17.67

32.26%

0.84

1.06

20.75%

15.32

21.97

30.27%

21.36

0.21

21.15

Household Durables

14.12

15.46

8.67%

0.7

0.59

-18.64%

24.81

16.33

-51.93%

8.7

5.3

3.4

Leisure Equip.&Products

21.39

17.82

-20.03%

1.13

0.84

-34.52%

34.11

22.05

-54.69%

9.89

2.63

7.26

Textile,Apparel,Luxury

17.2

16.34

-5.26%

1.03

0.71

-45.07%

23.46

17.23

-36.16%

13.08

7

6.08

Hotels, Restaurants, Leisure

23.95

21.67

-10.52%

1.24

1.04

-19.23%

25.35

24.18

-4.84%

10.04

4.51

5.53

Div. Consumer Services*

22.86

21.49

-6.38%

1.14

1.4

18.57%

15.72

18.64

15.67%

1.52

11.35

-9.83

Media

20

23.31

14.20%

1.29

1.55

16.77%

19.88

19.9

0.10%

1.67

-3.45

5.12

Distributors

17.84

14.32

-24.58%

0.79

0.48

-64.58%

22.35

16.28

-37.29%

10.57

3.18

7.39

Internet&Catalog Retail

58.71

37.37

-57.10%

1.22

1.8

32.22%

41.98

32.11

-30.74%

4.89

-14.7

19.59

Multiline Retail

21.72

19.41

-11.90%

0.41

0.48

14.58%

23.01

26.81

14.17%

6.67

10.44

-3.77

Specialty Retail

17.02

17.95

5.18%

0.53

0.56

5.36%

23.87

21.87

-9.14%

12.09

9.85

2.24

Click to enlarge

*Averages since 2005

Valuation

The following charts give an idea of the current status of industries relative to their historical average. The higher is 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).

Click to enlarge

Conclusion

XLY has underperformed SPY by about 4% in the last 3 months. The five S&P 500 consumer discretionary stocks with the best 3-month momentum are Coach Inc (NYSE:COH), Dollar Tree Inc (NASDAQ:DLTR), Michael Kors Holdings Ltd (NYSE:KORS), Mattel Inc. (NASDAQ:MAT), Ross Stores Inc (NASDAQ:ROST). ROST has hit an all-time high this month.

Since last month, most variations in valuation factors are moderate, except a sharp deterioration in P/E for Internet & Catalog Retail and a notable one in P/FCF for Leisure Equipment. For quality, the largest change is once again an improvement in ROE for the Automobiles industry.

Automobiles and Media look the most attractive, with all factors above their historical averages. Specialty Retail looks fairly priced: all factors are close to the historical average, and 3 out of 4 are above it. Distributors and Leisure Equipment look the most overpriced.

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 3 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 return. 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.

BIG

Big Lots Inc

DAN

Dana Holding Corp

F

Ford Motor Co

FOSL

Fossil Group Inc

GME

GameStop Corp.

IPG

Interpublic Group of Companies Inc.

OMC

Omnicom Group Inc.

OUTR

Outerwall Inc

STRA

Strayer Education Inc

VIAB

Viacom Inc

Click to enlarge

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Disclosure: I am/we are long KORS.

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.