Valuation Dashboard: Consumer Discretionary - Update

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Includes: AXL, BBBY, BBY, BYD, CAKE, CPS, DRI, F, HAR, HSNI, KSS, NFLX, ODP, OMC, SPY, XLY
by: Fred Piard

Summary

Valuation metrics in Consumer Discretionary.

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

Regarding valuation factors, Automobiles look underpriced. Multiline Retail, Specialty Retail and Media are close to fair value. Other industries in Consumer Discretionary are less attractive. The most overpriced group is Distributors.

Except for Diversified Consumer Services and Multiline Retail, quality ratios by industry (median ROEs) are above historical averages in this sector.

Since last month:

  • P/E has improved in Diversified Consumer Services, is stable in Media, Internet/Catalog retail, and deteriorated elsewhere.
  • P/S has deteriorated a bit in all groups.
  • P/FCF has improved in Leisure Equipment, Internet/Catalog Retail, Specialty Retail and deteriorated in Diversified Consumer Services, Multiline Retail.
  • ROE has improved in Auto Components, Automobiles, Leisure Equipment, Distributors and deteriorated in Media, Internet/Catalog Retail.

The SPDR Select Sector ETF (XLY) has outperformed SPY by less than 0.5% in the last 3 months. The five S&P 500 consumer discretionary stocks with the best 3-month momentum are Best Buy Co Inc (NYSE:BBY), Darden Restaurants Inc. (NYSE:DRI), Harman International Industries Inc. (NYSE:HAR), Kohl's Corp (NYSE:KSS), Netflix Inc (NASDAQ:NFLX). BBY and DRI have just hit 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 12.51%. The sector ETF XLY has an annualized return of 8.21% on the same period. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

AXL

American Axle & Manufacturing Holdings

AUTOCOMPONENT

BBBY

Bed Bath & Beyond Inc.

RETAILSPECIAL

BBY

Best Buy Co Inc

RETAILSPECIAL

BYD

Boyd Gaming Corp

HOSPITALITY

CAKE

Cheesecake Factory Inc. (The)

HOSPITALITY

CPS

Cooper-Standard Holdings Inc

AUTOCOMPONENT

F

Ford Motor Co

MANUFAUTOCYCLE

HSNI

HSN Inc

RETAILMAIL

ODP

Office Depot Inc

RETAILSPECIAL

OMC

Omnicom Group Inc.

MEDIA

Detail of Valuation and Quality indicators in Consumer Discretionary on 12/7/2016

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

Auto Components

16.68

15.33

-8.81%

0.85

0.62

-37.10%

23.3

21.23

-9.75%

11.97

3.9

8.07

Automobiles

13.05

17.67

26.15%

1.1

1.06

-3.77%

22.8

21.97

-3.78%

20.79

0.21

20.58

Household Durables

17.06

15.46

-10.35%

0.83

0.59

-40.68%

19.79

16.33

-21.19%

9.37

5.3

4.07

Leisure Equip.&Prod.

20.16

17.82

-13.13%

1.19

0.84

-41.67%

23.54

22.05

-6.76%

12.32

2.63

9.69

Textile,Apparel,Luxury

18.4

16.34

-12.61%

1.04

0.71

-46.48%

19.89

17.23

-15.44%

9.87

7

2.87

Hotels,Restau.,Leisure

25.16

21.67

-16.11%

1.43

1.04

-37.50%

26.97

24.18

-11.54%

8.14

4.51

3.63

Div. Consumer Sces*

25.48

21.49

-18.57%

1.25

1.4

10.71%

26.42

18.64

-41.74%

4.24

11.35

-7.11

Media

25.03

23.31

-7.38%

1.47

1.55

5.16%

18.68

19.9

6.13%

5.8

-3.45

9.25

Distributors

22.04

14.32

-53.91%

**

0.48

**

21.83

16.28

-34.09%

8.86

3.18

5.68

Internet&Catalog Retail

43.92

37.37

-17.53%

1.61

1.8

10.56%

40.61

32.11

-26.47%

-3.71

-14.7

10.99

Multiline Retail

22.78

19.41

-17.36%

0.41

0.48

14.58%

18.3

26.81

31.74%

8.97

10.44

-1.47

Specialty Retail

20.02

17.95

-11.53%

0.59

0.56

-5.36%

20.24

21.87

7.45%

12

9.85

2.15

*Averages since 2005 - ** Outliers

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.

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 XLY with SPY last 3 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,F.

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.

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