Valuation Dashboard: Utilities - Update

| About: Utilities Select (XLU)

Summary

4 key fundamental factors across industries in Utilities.

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 Utilities. 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

I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price to sales (P/S), 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 4/19/2016

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

ROE

Avg

D-ROE

Electric Utilities

21.31

15.94

-33.69%

2.09

1.22

-71.31%

8.84

10.43

-1.59

Gas Utilities

24.65

17.24

-42.98%

1.73

0.97

-78.35%

9.2

11.49

-2.29

Multi-Utilities

21.66

16.59

-30.56%

1.97

0.95

-107.37%

9.69

9.48

0.21

Water Utilities

26.57

23.68

-12.20%

5.6

3.94

-42.13%

4.91

7.96

-3.05

Ind.Power Prod./Energy Traders*

31.31

34.9

10.29%

2.39

4.16

42.55%

-14.14

-5.15

-8.99

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:

Quality (ROE)

Relative Momentum

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

Click to enlarge

Conclusion

XLU has outperformed SPY by 1.5% in the last 3 months. On this period, the 5 best performing S&P 500 Utilities stocks are AES Corporation (NYSE:AES), CenterPoint Energy Inc. (NYSE:CNP), Exelon Corp (NYSE:EXC), NiSource Inc. (NYSE:NI), NRG Energy Inc (NYSE:NRG). NI hit an all-time high this week.

Since last month:

  • P/E has worsened for Water Utilities.
  • Independent Power Producers have improved in P/E but sharply deteriorated in P/E.

No group is attractive in Utilities. Independent Power Producers look under-priced, but fell farther below the baseline in quality.

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 Utilities sector. They are all cheaper than their respective industry for the 2 valuation factors simultaneously: Price/Earnings and Price/Sales. Then they are selected for their higher Return on Equity.

This strategy rebalanced monthly has an annualized return about 10.76% with a 48% drawdown for a 17-year backtest. The sector ETF XLU has an annualized return of only 5.98% with a 53% drawdown on 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 a few trading rules and market timing. This is not investment advice. Do your own research before buying.

AEE

Ameren Corp

UTILMULTI

AEP

American Electric Power Co Inc

UTILELECTRIC

AWR

American States Water Co

UTILWATER

ED

Consolidated Edison Inc.

UTILMULTI

EXC

Exelon Corp

UTILELECTRIC

LG

Laclede Group Inc. (The)

UTILGAS

SWX

Southwest Gas Corp

UTILGAS

UGI

UGI Corp

UTILGAS

VVC

Vectren Corp

UTILMULTI

XEL

Xcel Energy Inc.

UTILELECTRIC

Click to enlarge

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Data provided by 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.