Valuation Dashboard: Energy And Materials - Update

| About: Energy Select (XLE)

Summary

Four key fundamental factors across industries in Energy and Basic Materials.

A valuation status relative to history.

A reference for picking stocks in each industry.

This series provides a valuation dashboard using the GICS classification. Each sector is covered once a month. This issue covers Energy and Basic Materials. It aims at giving reference values for a top-down approach across industries. A list of stocks to consider is offered in the conclusion without detailed analysis.

Methodology

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I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price-to-sales (P/S), Price-to-free cash flow (P/FCF), Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor, I calculate the difference with its own historical average - to the average for valuation ratios from the average for ROE - so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

Industry valuation table on 4/6/2016

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above ("D-xxx").

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Energy Equip. & Sces

15.55

24.2

35.74%

0.71

1.73

58.96%

11.75

35.34

66.75%

-13.53

7.34

-20.87

Oil/Gas/Fuel

15.8

18.53

14.73%

1.75

3.35

47.76%

13.3

29.03

54.19%

-20.01

4.47

-24.48

Chemicals

17.91

18.48

3.08%

1.34

1.21

-10.74%

26.69

25.37

-5.20%

6.75

6.74

0.01

Construction Materials

25.38

21.44

-18.38%

1.44

1.16

-24.14%

54.12

40.5

-33.63%

7.76

5.77

1.99

Packaging

26.41

17.96

-47.05%

0.91

0.61

-49.18%

24.01

20.09

-19.51%

20.61

8.34

12.27

Metals & Mining

25.73

19.83

-29.75%

1.97

2.65

25.66%

15.67

25.53

38.62%

-19.7

-8.6

-11.1

Paper & Wood

15.63

21.27

26.52%

0.82

0.72

-13.89%

28.21

22.81

-23.67%

8.99

4.99

4

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The following charts give an idea of the current valuation status of Energy and Materials 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 in Materials (NYSEARCA:XLB) and Energy (NYSEARCA:XLE) with the SPY (chart from freestockcharts.com).

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Conclusion

In the last 3 months, XLE has underperformed SPY by about 1%. XLB has outperformed the benchmark by about 2.5%. The five S&P 500 stocks in Energy and Materials with the best momentum on a 3-month period are Cabot Oil & Gas Corp. (NYSE:COG), Columbia Pipeline Group Inc. (NYSE:CPGX), Freeport-McMoRan Inc. (NYSE:FCX), Newmont Mining Corp. (NYSE:NEM), and Range Resources Corp. (NYSE:RRC).

Since last month, the two Energy groups have improved in all valuation factors and deteriorated in quality (ROE). The group of Chemicals has improved in P/FCF and is stable in other factors. Construction Materials has improved in P/E and deteriorated in ROE. All valuation factors have worsened for Packaging. The Metals and Mining group has improved in P/E and P/FCF. Paper & Wood has deteriorated in P/FCF and ROE.

No industry in these sectors is really appealing. Chemicals is likely the safest one, just on its baseline in quality and close to a fair value. Comparing relative valuation and quality factors, the Energy and Metals/Mining groups still look like a nest of value traps. Of course, this situation may change drastically with oil and metal prices. Personally, I stay away from a speculative bet on oil price, which is, in fact, a bet on OPEC policy.

Comparing individual fundamental factors to the industry factors provided in the table may help find quality stocks at a reasonable price in any industry. The next table shows a list of stocks in the Energy and Materials sectors. They are all cheaper than their respective industry for the 3 valuation factors simultaneously: Price/Earnings, Price-to-sales, Price-to-free cash flow. Then, they are selected for their higher Return on Equity.

This screen updated and rebalanced monthly has an annualized return about 17% for a 17-year backtest. The corresponding sector ETFs, XLE and XLB, have an annualized return of respectively 8.32% and 6.79% for the same period. Past performance, real or simulated, is not a guarantee of future return. This list may be considered an entry point for further due diligence, or as a portfolio after adding trading rules and market timing. This is not investment advice. Do your own research before buying.

ATW

Atwood Oceanics Inc.

ENERGYEQUIP

EMN

Eastman Chemical Co.

CHEM

IOSP

Innospec Inc.

CHEM

KS

KapStone Paper & Packaging Corp.

FORESTRY

LYB

LyondellBasell Industries NV

CHEM

MOS

Mosaic Company (The)

CHEM

TSO

Tesoro Corp.

OILGASFUEL

VLO

Valero Energy Corp.

OILGASFUEL

WNR

Western Refining Inc.

OILGASFUEL

WOR

Worthington Industries Inc.

MINING

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Data provided by portfolio123.

Disclosure: I am/we are long TSO.

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.