Valuation Dashboard: Energy And Materials - Update

| About: Energy Select (XLE)
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Summary

Valuation metrics in Energy and Materials.

Evolution since last month.

A list of stocks with better factors than their industries.

This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages in each industry.

Executive summary

Energy stocks surged with oil price after the last OPEC meeting. The real consequences on fundamentals will be visible in the next quarters. At this time, the sector still looks like a value trap: valuation ratios are attractive and the median ROE is far in negative territory. In Basic Materials, all industries are overpriced regarding Price-to-Earnings and Price-to-Sales, but closer to fair value for P/FCF. Construction Materials even looks 30% cheaper than its historical average for this factor and has also an excellent quality factor. Packaging is widely overvalued, but has the best quality factor of the group. Chemicals is moderately overpriced and close to the baseline in quality. Metals/Mining is overpriced and below the baseline in quality.

Since last month:

  • All valuation factors have improved in Paper/Wood and deteriorated elsewhere because of the recent rally.
  • ROE has improved in Construction Materials and Oil/Gas/Fuel, deteriorated a bit in Energy Equipment and is stable elsewhere.

In the last three months the SPDR Select Sector ETFs in Materials (NYSEARCA:XLB) and Energy (NYSEARCA:XLE) have outperformed SPY by about 6% and 2%, respectively. The five S&P 500 stocks in Energy and Materials with the best momentum on a three-month period are Baker Hughes Inc. (BHI), Freeport-McMoRan Inc (NYSE:FCX), Helmerich & Payne Inc. (NYSE:HP), Nucor Corp (NYSE:NUE), and Transocean Ltd (NYSE:RIG). NUE is at an all-time high.

Some cheap stocks relative to their industries

The stocks listed below 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 8.32% and 6.79%, respectively on the same period. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

CBT

Cabot Corp

CHEM

EMN

Eastman Chemical Co

CHEM

FUL

H.B. Fuller Co.

CHEM

LYB

LyondellBasell Industries NV

CHEM

OI

Owens-Illinois Inc.

PACKAGING

RDC

Rowan Companies plc

ENERGYEQUIP

RYAM

Rayonier Advanced Materials Inc

CHEM

TSO

Tesoro Corp

OILGASFUEL

VLO

Valero Energy Corp

OILGASFUEL

WOR

Worthington Industries Inc.

MINING

Detail of Valuation and Quality indicators in Energy and Materials on 12/5/2016

I take four 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. Its 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 four industry factors. There are three 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

20.82

24.2

13.97%

1.16

1.73

32.95%

15.69

35.34

55.60%

-20.36

7.34

-27.7

Oil/Gas/Fuel

18.26

18.53

1.46%

2.81

3.35

16.12%

27.55

29.03

5.10%

-18.17

4.47

-22.64

Chemicals

21.93

18.48

-18.67%

1.62

1.21

-33.88%

25.09

25.37

1.10%

8.57

6.74

1.83

Construction Materials

29.76

21.44

-38.81%

1.63

1.16

-40.52%

28.13

40.5

30.54%

13.56

5.77

7.79

Packaging

24.6

17.96

-36.97%

1.04

0.61

-70.49%

24.5

20.09

-21.95%

20.88

8.34

12.54

Metals&Mining

34.09

19.83

-71.91%

3.02

2.65

-13.96%

25.15

25.53

1.49%

-16.61

-8.6

-8.01

Paper&Wood

24.42

21.27

-14.81%

0.95

0.72

-31.94%

24.51

22.81

-7.45%

8.51

4.99

3.52

The following charts give an idea of the current status of three 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.

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 XLB and XLE with SPY last three months (chart from FreeStockCharts.com).

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Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).

Disclosure: I am/we are long SPY.

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.