Valuation Dashboard: Consumer Discretionary - Update

| About: Consumer Discretionary (XLY)

Summary

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

A valuation status relative to history.

A reference for picking stocks in each industry.

This article series provides a dashboard of industries in each sector of the GICS classification. It starts with a visual status of valuation and quality factors relative to their historical averages. Then, it gives a list of stocks among the best of their industries according to the same factors. The methodology and all the numbers are given at the end of the article. Click "Follow" at the top of this page if you want to be notified of monthly updates.

Valuation and Quality indicators in Consumer Discretionary on 7/7/2016

The following charts give an idea of the current status of three valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors the difference to average is calculated in the direction where positive is good. For valuation ratios lower is better, for ROE higher is better. On the charts below higher is always better. Refer to the appendix for the detailed data and methodology.

Price/Earnings relative to historical average:

Price/Sales relative to historical average:

Price/Free Cash Flow relative to historical average:

ROE relative to historical average:

Momentum

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

Click to enlarge

Interpretation

XLY Has lagged SPY by about 1.6% in the last three months. The five S&P 500 consumer discretionary stocks with the best three-month momentum are Amazon.com Inc (NASDAQ:AMZN), Dollar General (NYSE:DG), Dollar Tree (NASDAQ:DLTR), Johnson Controls Inc. (NYSE:JCI), and Ulta Salon Cosmetics & Fragrance (NASDAQ:ULTA). All of them except JCI have hit an all-time high in the first days of July.

Since last month:

  • P/E has improved in all industries.
  • P/S has improved in all industries except Household Durables, Multiline Retail (stable), Hotels and Restaurants (deteriorated).
  • P/FCF has improved in all industries except Household Durables and Specialty Retail (deteriorated).
  • ROE has improved in Media, deteriorated in Auto Components, Internet and Catalog Retail and is stable elsewhere.

The Automobiles industry still is the most attractive, far above the baseline for all factors. Internet and Catalog Retail and Media look also undervalued and above the baseline in quality. Other industries are much less appealing. Textile/Luxury, Household Durables and Distributors are the most overpriced.

List of stocks to consider

(see methodology in the appendix)

AN

AutoNation Inc

RETAILSPECIAL

AXL

American Axle & Manufacturing Holdings

AUTOCOMPONENT

BBY

Best Buy Co. Inc.

RETAILSPECIAL

EXPR

Express Inc

RETAILSPECIAL

F

Ford Motor Co

MANUFAUTOCYCLE

FOSL

Fossil Group Inc

WEARABLE

M

Macy's Inc

STORE

OMC

Omnicom Group Inc.

MEDIA

OUTR

Outerwall Inc

RETAILSPECIAL

VIAB

Viacom Inc

MEDIA

Click to enlarge

Appendix

Dashboard methodology:

I take four 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).

The next table reports the four industry factors. There are three 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

Auto Components

13.49

15.33

12.00%

0.66

0.62

-6.45%

22.1

21.23

-4.10%

9.39

3.9

5.49

Automobiles

11.48

17.67

35.03%

0.88

1.06

16.98%

14.95

21.97

31.95%

20.24

0.21

20.03

Household Durables

16.37

15.46

-5.89%

0.73

0.59

-23.73%

26.26

16.33

-60.81%

8.96

5.3

3.66

Leisure Equip.&Prod.

19.09

17.82

-7.13%

1.16

0.84

-38.10%

19.79

22.05

10.25%

12.58

2.63

9.95

Textile,Apparel,Luxury

17.77

16.34

-8.75%

1.09

0.71

-53.52%

22.39

17.23

-29.95%

11.81

7

4.81

Hotels,Restau.,Leisure

23.86

21.67

-10.11%

1.28

1.04

-23.08%

27.81

24.18

-15.01%

9.4

4.51

4.89

Div. Consumer Sces*

21.93

21.49

-2.05%

1.14

1.4

18.57%

23.62

18.64

-26.72%

1.62

11.35

-9.73

Media

23.38

23.31

-0.30%

1.4

1.55

9.68%

18.05

19.9

9.30%

3.88

-3.45

7.33

Distributors

23.63

14.32

-65.01%

NA**

0.48

NA**

20.39

16.28

-25.25%

8.61

3.18

5.43

Internet&Catalog Retail

38.32

37.37

-2.54%

1.37

1.8

23.89%

31.39

32.11

2.24%

0.11

-14.7

14.81

Multiline Retail

22.22

19.41

-14.48%

0.4

0.48

16.67%

22.13

26.81

17.46%

7.01

10.44

-3.43

Specialty Retail

18.46

17.95

-2.84%

0.52

0.56

7.14%

25.28

21.87

-15.59%

10.67

9.85

0.82

Click to enlarge

*Averages since 2005 - ** Outliers

Stock list methodology:

The stocks listed above are in the S&P 1500 index, cheaper than their respective industry factor for price/earnings, price/sales and price/free cash flow. The 10 companies with the highest return on equity are kept in the final selection.

This strategy 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.

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

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.