Valuation Dashboard: Energy And Materials - Update

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Includes: ALB, EMN, HW, IOSP, IP, LYB, NEM, OI, OKE, SCL, SE, SPY, TSO, WMB, WNR, WOR, XLB, XLEFF
by: Fred Piard

Summary

4 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 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 Energy and Materials on 8/3/2016

The following charts give an idea of the current status of 3 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 in Materials (NYSEARCA:XLB) and energy (NYSEARCA:XLE) with SPY (chart from freestockcharts.com).

Click to enlarge

Interpretation

In the last 3 months XLE and XLB have underperformed SPY respectively by about 5.4% and 1.6%. The five S&P 500 stocks in Energy and Materials with the best momentum on a 3-month period are Albemarle Corp (NYSE:ALB), Newmont Mining Corp (NYSE:NEM), ONEOK Inc.(NYSE:OKE), Spectra Energy Corp (NYSE:SE), Williams Cos Inc. (NYSE:WMB). ALB reached an all-time high last month.

Since last month:

  • P/E has improved in Energy Equipment&Services, Construction Materials, Chemicals, Paper&Wood and deteriorated in Metals&Mining.
  • P/S has deteriorated in Paper&Wood, Metals&Mining and is stable elsewhere.
  • P/FCF has improved in Paper&Wood, Packaging and deteriorated a bit in Energy.
  • ROE has significantly improved in Construction Materials.

Construction Materials and Paper&Wood are the less overpriced industries and above the baseline in quality. No other industry in these sectors is appealing. Packaging is the most overpriced industry, which may be partly compensated by the best quality. Energy still looks like a value trap with attractive valuations and a negative ROE far below the baseline.

List of stocks to consider

(see methodology below)

EMN

Eastman Chemical Co

CHEM

HW

Headwaters Inc

MATCONSTR

IOSP

Innospec Inc

CHEM

IP

International Paper Co

PACKAGING

LYB

LyondellBasell Industries NV

CHEM

OI

Owens-Illinois Inc.

PACKAGING

SCL

Stepan Co

CHEM

TSO

Tesoro Corp

OILGASFUEL

WNR

Western Refining Inc

OILGASFUEL

WOR

Worthington Industries Inc.

MINING

Click to enlarge

Appendix

Dashboard methodology:

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).

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

9.87

24.2

59.21%

0.98

1.73

43.35%

10.35

35.34

70.71%

-17.02

7.34

-24.36

Oil/Gas/Fuel

18.27

18.53

1.40%

2.24

3.35

33.13%

13.39

29.03

53.88%

-25.37

4.47

-29.84

Chemicals

19.43

18.48

-5.14%

1.45

1.21

-19.83%

28.64

25.37

-12.89%

7.21

6.74

0.47

Construction Materials

20.51

21.44

4.34%

1.56

1.16

-34.48%

41.42

40.5

-2.27%

13.78

5.77

8.01

Packaging

30.33

17.96

-68.88%

0.99

0.61

-62.30%

30.5

20.09

-51.82%

18.55

8.34

10.21

Metals&Mining

40.91

19.83

-106.30%

3.86

2.65

-45.66%

21.24

25.53

16.80%

-21.22

-8.6

-12.62

Paper&Wood

25.5

21.27

-19.89%

0.69

0.72

4.17%

26.03

22.81

-14.12%

8.34

4.99

3.35

Click to enlarge

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 17% for a 17-year backtest. The corresponding sector ETFs XLE and XLB have an annualized return of respectively 8.32% and 6.79% 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 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 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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.