Valuation Dashboard: Energy And Materials - Update

| About: Energy Select (XLE)

Summary

Valuation metrics in Energy and Materials.

Evolution since last month.

A list of stocks looking cheap in 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 are in a horizontal range after surging in November because of a supportive OPEC meeting. If it is enforced, the real consequences of a new OPEC policy will be visible on fundamentals in the next quarters. At this time, the sector still looks like a value trap: some valuation ratios are attractive or close to fair value, but the median ROE is far in negative territory. In Basic Materials, all industries are overpriced regarding Price-to-Earnings and Price-to-Sales, but Construction Materials looks 30% cheaper than its historical average in Price-to-Free Cash Flow, and has also an excellent quality factor. Packaging and Metals/Mining are widely overvalued. The former has the best quality factor of the group, whereas the latter is below the baseline in quality.

Since last month:

  • P/E has improved a bit in Paper/Wood, is quite stable in Chemicals, Packaging and deteriorated elsewhere.
  • P/S and P/FCF are stable in Paper/Wood, Packaging, Construction Materials, Chemicals and deteriorated in Energy and Metals/Mining.
  • ROE has improved in Paper/Wood, Metals/Mining, Energy and is stable in Chemicals, Packaging, Construction Materials.
  • The five S&P 500 stocks in Energy and Materials with the best one-month return are Albemarle Corp. (NYSE:ALB), CF Industries Holdings Inc. (NYSE:CF), Hess Corp. (NYSE:HES), Transocean Ltd. (NYSE:RIG), Valero Energy Corp. (NYSE:VLO). ALB hit an all-time high in December; VLO did it this week.

Some cheap stocks in their industries

I update every month eight lists like this one covering all sectors (some sectors are grouped). The eight lists together have returned about 25% in 2016. If you want to stay informed of updates, click "Follow" at the top of this page. My Marketplace Subscribers have an early access to the stock lists before they are published in free-access articles.

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. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

INT

World Fuel Services Corp.

ENERGY

OILGASFUEL

RDC

Rowan Companies plc

ENERGY

ENERGYEQUIP

TSO

Tesoro Corp.

ENERGY

OILGASFUEL

VLO

Valero Energy Corp.

ENERGY

OILGASFUEL

CBT

Cabot Corp.

MATERIALS

CHEM

EMN

Eastman Chemical Co.

MATERIALS

CHEM

LYB

LyondellBasell Industries NV

MATERIALS

CHEM

OI

Owens-Illinois Inc.

MATERIALS

PACKAGING

RYAM

Rayonier Advanced Materials Inc.

MATERIALS

CHEM

WOR

Worthington Industries Inc.

MATERIALS

MINING

Detail of Valuation and Quality indicators in Energy and Materials on 1/5/2017

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

24.77

24.2

-2.36%

1.56

1.73

9.83%

21.76

35.34

38.43%

-19.28

7.34

-26.62

Oil/Gas/Fuel

19.49

18.53

-5.18%

3.25

3.35

2.99%

37.24

29.03

-28.28%

-15.47

4.47

-19.94

Chemicals

22.43

18.48

-21.37%

1.68

1.21

-38.84%

27.61

25.37

-8.83%

8.91

6.74

2.17

Construction Materials

30.59

21.44

-42.68%

1.65

1.16

-42.24%

28.42

40.5

29.83%

13.32

5.77

7.55

Packaging

25.37

17.96

-41.26%

1.05

0.61

-72.13%

24.66

20.09

-22.75%

21.19

8.34

12.85

Metals & Mining

38.73

19.83

-95.31%

3.53

2.65

-33.21%

26.61

25.53

-4.23%

-14.84

-8.6

-6.24

Paper & Wood

23.74

21.27

-11.61%

0.91

0.72

-26.39%

24.91

22.81

-9.21%

9.37

4.99

4.38

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 in one month (chart from freestockcharts.com).

If you want to stay informed of my updates on this topic and other articles, click the "Follow" tab at the top of this article.

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.

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