S&P 500 Valuation Dashboard - February Update

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Summary

Scores in value and a quality are given for each sector.

They are calculated from key fundamental factors.

...and their comparison with historical averages.

This article is part of a monthly series giving a valuation by sector of companies in the S&P 500 index (NYSEARCA:SPY). I follow some fundamental factors for every sector and compare them to historical baselines, so as to create a synthetic dashboard with a Value Score (V-score) and a Quality Score (Q-score). In this series you can find numbers that may be useful in a top-down approach. There is no individual stock analysis or recommendations. You can refine your research reading articles by industry experts here.

Methodology

  • The median value of 4 valuation ratios is calculated for S&P 500 companies in each sector: Price/Earnings (P/E), Forward Price Earnings for the current year (Fwd P/E), Price to sales (P/S), Price to free cash flow (P/FCF).
  • It is compared in percentage to its own historical average Avg. For example, a difference of 10% means that the current median ratio is 10% overpriced relative to its historical average in the sector.
  • The V-score of a sector is the average of differences in percentage for the 4 factors, multiplied by -1. The higher is the better.
  • The Q-score is the difference between the current median ROE (return on equity) and its historical average.

The choice of the valuation and quality ratios has been justified in previous articles. Among the simple, publicly available fundamental factors, they are the best predictors of future returns according to 17-year backtests. Median values are simpler than capital-weighted averages or aggregate ratios. They are also better reference data than averages for stock-picking. Each median is the middle point of a sector, which can be used to separate good and bad elements. Moreover, a median is less sensitive to outliers than an average. A note of caution: for ETF investors, the most relevant valuation ratio would be an aggregate factor, neither a median nor a capital-weighted average.

Sector valuation table on 2/10/2016

The next table reports the median valuation ratios. For example, the P/E column gives the current median value of P/E in each sector. The next "Avg" column gives its average between January 1999 and August 2015, which is my arbitrary reference of fair valuation. The next "%Hist" column is the difference between the historical average and the current value, in percentage. So there are 3 columns relative to P/E, and also 3 for each ratio. The first column "V-score" shows the value score as defined above.

V-score

P/E

Avg

%Hist

Fwd P/E

Avg

%Hist

P/S

Avg

%Hist

P/FCF

Avg

%Hist

All

-6.72

19.38

19.18

1.04

14.94

14.83

0.74

1.93

1.58

22.15

25.43

24.7

2.96

Cons.Disc.

-5.78

18.33

18.7

-1.98

13.77

14.56

-5.43

1.4

1.12

25.00

24.82

23.52

5.53

Cons.Stap.

-33.94

27.18

20.48

32.71

19.99

16.27

22.86

2.6

1.54

68.83

43.74

39.28

11.35

Energy

-3.55

21.16

17.8

18.88

19.88

14.38

38.25

1.32

1.94

-31.96

27.24

30.59

-10.95

Financials

-9.76

14.55

16.16

-9.96

11.22

12.38

-9.37

2.17

2.03

6.90

18.57

12.26

51.47

Healthcare

6.30

24.62

23.76

3.62

14.56

16.85

-13.59

3.03

2.93

3.41

24.44

30.04

-18.64

Industrials

-1.35

17.66

18.75

-5.81

14.37

14.52

-1.03

1.35

1.24

8.87

26.53

25.66

3.39

I.T. & Tel.

19.11

19.65

27.16

-27.65

13.55

19.29

-29.76

2.59

2.72

-4.78

22.31

26.02

-14.26

Materials

-12.85

23.34

19.74

18.24

14.14

14.36

-1.53

1.33

1.15

15.65

32.77

27.53

19.03

Utilities

-39.84

19.63

15.21

29.06

16.99

13.15

29.20

1.79

1.11

61.26

Energy: P/FCF Avg starts in 2000 - Utilities: P/FCF not taken into account because of frequent outliers

V-score chart

Sector quality table

The next table gives a score for each sector relative to its own historical average. Here, only one factor is accounted.

Q-score (Diff)

Median ROE

Avg

All

-0.40

14.53

14.93

Cons.Disc.

3.03

20.37

17.34

Cons.Stap.

-3.94

20.12

24.06

Energy

-18.58

-3.69

14.89

Financials

-2.30

10.01

12.31

Healthcare

-3.22

14.38

17.6

Industrials

3.24

20.19

16.95

I.T. & Tel.

2.12

15.23

13.11

Materials

4.00

17.89

13.89

Utilities

-1.96

9.39

11.35

Q-score chart

Relative momentum

The next table and chart show the return in one month of all sectors represented by their respective SPDR ETFs.

SPDR ETF

1-month return

All

SPY

-4.01%

Cons.Disc.

XLY

-7.40%

Cons.Stap.

XLP

0.91%

Energy

XLE

-3.89%

Financials

XLF

-8.73%

Healthcare

XLV

-5.50%

Industrials

XLI

-0.74%

I.T. & Tel.

XLK

-3.81%

Materials

XLB

-1.54%

Utilities

XLU

7.83%

Interpretation

S&P 500 companies as a group look overpriced by about 6.7%, with a quality factor close to the historical average.

Since last issue's statistics (1/19):

  • The S&P 500 is down by about 2.5%.
  • Overpricing has decreased by about 1.5%.
  • Utilities was the best performing sector. Consumer Staples is the second best and the only other one with a positive return.
  • Quality is stable globally, and with little variation in most sectors. It has improved in healthcare and deteriorated in Energy.
  • Valuation has deteriorated the most in Energy, Utilities and Materials. It has improved the most in Technology, Healthcare and Financials.

The most overpriced sectors are Utilities and Consumer Staples. The drop in V-score for Energy is a consequence of the bad business performance shown for months by the Q-score. The latter is still very bad, which means valuations in Energy companies may still worsen. The most attractive sector is still Technology (grouped with Telecom). It looks underpriced and has a median ROE above the historical average. Healthcare is undervalued, but has a quality slightly below the baseline. Industrials looks fairly valued and has a quality factor above the baseline. For Materials and Consumer Discretionary, a quality factor above the baseline may partly justify overpricing.

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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.

Additional disclosure: Short S&P 500 for hedging puposes.