S&P 500 Valuation Dashboard - Update

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Summary

A score in value and quality for every sector.

Evolution since last month.

The best and the worst sectors for these metrics.

This monthly series gives fundamental scores by sector for companies in the S&P 500 index ( SPY). I follow chosen fundamental factors for every sector and compare them to a historical baseline, so as to create a synthetic dashboard with a Value Score (V-score) and a Quality Score (Q-score). You can find here data 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 Earning 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. For example, a difference of 10% means that the current median ratio is 10% over- or under-priced 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. A median is also less sensitive to outliers. 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 4/4/2016

The next table reports the 4 valuation factors. There are 3 columns for each factor: the current median value, the historical average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference in percentage ("%Hist"). 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

-18.68

21.48

19.18

11.99

16.16

14.83

8.97

2.19

1.58

38.61

28.44

24.7

15.14

Cons.Disc.

-22.19

20.02

18.7

7.06

15.51

14.56

6.52

1.71

1.12

52.68

28.81

23.52

22.49

Cons.Stap.

-31.78

27.36

20.48

33.59

20.14

16.27

23.79

2.62

1.54

70.13

39.13

39.28

-0.38

Energy

-25.24

27.02

17.8

51.80

25.68

14.38

78.58

1.53

1.94

-21.13

28.06

30.59

-8.27

Financials

-19.50

16.89

16.16

4.52

12.31

12.38

-0.57

2.45

2.03

20.69

18.8

12.26

53.34

Healthcare

0.13

27.37

23.76

15.19

15.42

16.85

-8.49

3.23

2.93

10.24

24.79

30.04

-17.48

Industrials

-12.53

19.61

18.75

4.59

16.15

14.52

11.23

1.49

1.24

20.16

29.29

25.66

14.15

I.T. & Tel.

2.04

21.89

27.16

-5.19

15.04

19.29

-12.08

3.01

2.72

10.66

25.62

26.02

-1.54

Materials

-27.12

25.75

19.74

30.45

16.96

14.36

18.11

1.65

1.15

43.48

32.06

27.53

16.45

Utilities

-50.11

21.1

15.21

38.72

17.52

13.15

33.23

1.98

1.11

78.38

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

-0.83

14.1

14.93

Cons.Disc.

3.47

20.81

17.34

Cons.Stap.

-0.86

23.2

24.06

Energy

-19.73

-4.84

14.89

Financials

-2.33

9.98

12.31

Healthcare

-4.37

13.23

17.6

Industrials

2.92

19.87

16.95

I.T. & Tel.

2.29

15.4

13.11

Materials

3.24

17.13

13.89

Utilities

-1.95

9.4

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.

sector

SPDR ETF

1-month return

All

SPY

3.99%

Cons.Disc.

XLY

3.81%

Cons.Stap.

XLP

4.05%

Energy

XLE

1.28%

Financials

XLF

2.35%

Healthcare

XLV

1.81%

Industrials

XLI

4.64%

I.T. & Tel.

XLK

6.16%

Materials

XLB

5.55%

Utilities

XLU

8.41%

Interpretation

S&P 500 companies as a group look overpriced by about 19%, with a quality factor close to the historical average.

Since last issue's statistics (3/5):

  • The S&P 500 is up by 4%.
  • The best performers are Utilities, IT and Materials.
  • Overpricing has increased by about 2.5%. The only valuation factor showing an improvement is Forward Price/Earnings in Energy.
  • Valuation measured by V-Score is stable for Healthcare and Consumer Staples. It has deteriorated in all other sectors,
  • Quality measured by Q-Score is stable in all sectors.

Taking into account valuation and quality, the less attractive sectors are the same as last month: Utilities and Energy. Consumer Staples and Financials look also widely overpriced, with both valuation and quality metrics below the historical baseline. Technology is the only sector above the baseline in valuation and quality. Healthcare looks fairly valued, but below the baseline in quality. A quality above the baseline may partly justify the overpricing in Materials, Industrials and Consumer Discretionary.

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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.