Valuation Dashboard: Utilities - Update

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Includes: AEP, AES, AWK, AWR, CNP, DTE, ED, HE, NRG, SPY, SR, SWX, UGI, VVC, WGL, XEL, XLU
by: Fred Piard

Summary

I discuss key fundamental factors across industries in utilities.

I provide a valuation status relative to history.

I also provide 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 Utilities on 7/10/2016

The following charts give an idea of the current status of 2 valuation factors (P/E, P/S) 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, and 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:

ROE relative to historical average:

Momentum

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

Click to enlarge

Interpretation

XLU has outperformed SPY by about 5% in the last 3 months. During this period, the 5 best performing S&P 500 Utilities stocks are AES Corporation (NYSE:AES), American Water Works Company Inc (NYSE:AWK), CenterPoint Energy Inc. (NYSE:CNP), DTE Energy Co (NYSE:DTE), NRG Energy Inc (NYSE:NRG). AWK, CNP, DTE have reached all-time highs in July.

Since last month:

  • All valuation factors have deteriorated with the sector momentum driving prices higher, with the exception of a moderate improvement in P/S in Independent Power Producers/Energy Traders.
  • Median ROEs are stable, with the exception of a deterioration in the same industry.

All factors of all industries are below the historical average except for P/S in Independent Power Producers. Utilities are the most overpriced GICS sector of the S&P 500 index and the best performer in June. At such valuations, we can wonder if this defensive sector is still safe or if a flight to safety has inflated a bubble.

List of stocks to consider

(see methodology in the appendix)

AEP

American Electric Power Co Inc

UTILELECTRIC

AWR

American States Water Co

UTILWATER

ED

Consolidated Edison Inc.

UTILMULTI

HE

Hawaiian Electric Industries Inc.

UTILELECTRIC

SR

Spire Inc

UTILGAS

SWX

Southwest Gas Corp

UTILGAS

UGI

UGI Corp

UTILGAS

VVC

Vectren Corp

UTILMULTI

WGL

WGL Holdings Inc.

UTILGAS

XEL

Xcel Energy Inc.

UTILELECTRIC

Click to enlarge

Appendix

Dashboard methodology:

I take 3 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).

The next table reports the 3 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

23.32

15.94

-46.30%

2.3

1.22

-88.52%

8.85

10.43

-1.58

Gas Utilities

26.16

17.24

-51.74%

2.09

0.97

-115.46%

8.82

11.49

-2.67

Multi-Utilities

23.79

16.59

-43.40%

2.11

0.95

-122.11%

8.88

9.48

-0.6

Water Utilities

28.17

23.68

-18.96%

6.02

3.94

-52.79%

5.54

7.96

-2.42

Ind.Power Prod./Energy Traders*

53.66

34.9

-53.75%

2.35

4.16

43.51%

-9.76

-5.15

-4.61

Click to enlarge

* Averages since 2005

Stock list methodology:

The stocks listed above are in the S&P 1500 index, cheaper than their respective industry factor for Price/Earnings and Price/Sales. The 10 companies with the highest Return on Equity are kept in the final selection.

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.

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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.