Valuation Dashboard: Financials - Update

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Includes: AMP, CBG, CINF, CME, ENVA, INN, MHLD, NAVI, PLD, SPGI, SPY, STT, UIHC, UVE, WD, WRLD, XLF
by: Fred Piard

Summary

4 key fundamental factors across industries in the Financial 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 Financials on 8/8/2016

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 (XLF) with SPY (chart from freestockcharts.com).

Click to enlarge

Interpretation

XLF has lagged the S&P 500 ETF by about 2% in the last 3 months. The 5 top momentum stocks on this period in the S&P financial sector are: Cincinnati Financial Corp (NASDAQ:CINF), CME Group Inc (NASDAQ:CME), ProLogis Inc (NYSE:PLD), S&P Global Inc (NYSE:SPGI), State Street Corp (NYSE:STT). All of them except STT have reached an all-time high in July or August.

Since last month:

  • P/E has improved in Real Estate Management and deteriorated in Mortgage Finance, Diversified Financial Services, Consumer Finance, Capital Markets.
  • P/S has improved in Diversified Financial Services and deteriorated a bit elsewhere.
  • P/FCF has improved in Real Estate Management and deteriorated elsewhere.
  • ROE has improved in Real Estate Management and is stable elsewhere.

Consumer Finance is the only under-priced group according to all valuation factors. Capital Markets comes in second rank for valuation metrics. Both are moderately below the baseline in quality. REITs and Real Estate Management have mixed valuation factors and are above the baseline in quality. The most overpriced group is Diversified Financial Services.

List of stocks to consider

(see methodology in the appendix)

AMP

Ameriprise Financial Inc

CAPMARKET

CBG

CBRE Group Inc

REMGMT

ENVA

Enova International Inc

CONSUMERFIN

INN

Summit Hotel Properties Inc

REIT

MHLD

Maiden Holdings Ltd

INSURANCE

NAVI

Navient Corp

CONSUMERFIN

UIHC

United Insurance Holdings Corp

INSURANCE

UVE

Universal Insurance Holdings

INSURANCE

WD

Walker & Dunlop Inc

BANKSNL

WRLD

World Acceptance Corp

CONSUMERFIN

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

Commercial Banks

15.01

15.24

1.51%

2.89

2.06

-40.29%

17.12

13.44

-27.38%

8.57

8.89

-0.32

Thrifts & Mortgage Fin.*

18.85

20.66

8.76%

2.86

2.03

-40.89%

17.59

14.75

-19.25%

6

5.02

0.98

Diversified Fin. Sces

22.61

17.85

-26.67%

3.49

2.94

-18.71%

29.96

16.13

-85.74%

6.95

6.38

0.57

Consumer Finance*

12.77

13.15

2.89%

1.27

1.47

13.61%

6.07

8.22

26.16%

9.49

11.83

-2.34

Capital Markets*

18.39

18.07

-1.77%

3.43

3.06

-12.09%

10.25

19.62

47.76%

3.98

7.89

-3.91

Insurance

15.07

13.7

-10.00%

1.25

1.07

-16.82%

11.44

8.99

-27.25%

8.03

8.71

-0.68

REITs**

32.26

35.42

8.92%

6.1

4.56

-33.77%

47.6

38.74

-22.87%

5.78

4.07

1.71

Real Estate Management**

30.62

31.19

1.83%

3.69

3.06

-20.59%

34.23

25.55

-33.97%

2.54

-1.33

3.87

Click to enlarge

* Averages since 2003 - ** Averages since 2006

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 10.1% with a 72% drawdown for a 17-year backtest. The sector ETF XLF has an annualized return of only 2.24% with a 84% 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.

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.