S&P 500 Valuation Dashboard - Update

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Includes: CRF, DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PPLC, PPSC, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL, RWM, RYARX, RYRSX, SBUS, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TALL, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USA, USSD, USWD, UWM, VFINX, VOO, VTWO, VV, XLB, XLE, XLF, XLI, XLK, XLP, XLRE, XLU, XLV, XLY, ZLRG
by: Fred Piard

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 (NYSEARCA: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.

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 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.

Sector valuation table on 2/6/2017

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

-24.98

21.89

19.18

14.13

17.33

14.83

16.86

2.46

1.58

55.70

27.97

24.7

13.24

Cons.Disc.

-11.22

18.39

18.7

-1.66

15.12

14.56

3.85

1.52

1.12

35.71

25.16

23.52

6.97

Cons.Stap.

-33.30

24.24

20.48

18.36

20.36

16.27

25.14

2.61

1.54

69.48

47.23

39.28

20.24

Energy

-55.00

25.87

17.8

45.34

30.35

14.38

111.06

3.39

1.94

74.74

27.18

30.59

-11.15

Financials

-31.45

16.9

15.02

12.52

13.29

11.55

15.06

2.64

1.89

39.68

15.9

10.03

58.52

Healthcare

0.93

25.1

23.76

5.64

16.03

16.85

-4.87

3.17

2.93

8.19

26.23

30.04

-12.68

Industrials

-27.31

22.45

18.75

19.73

17.88

14.52

23.14

1.8

1.24

45.16

31.1

25.66

21.20

I.T. & Tel.

0.59

25.64

27.16

-5.60

16.22

19.29

-15.91

3.41

2.72

25.37

24.4

26.02

-6.23

Materials

-48.07

27.26

19.74

38.10

18.81

14.36

30.99

2.16

1.15

87.83

37.27

27.53

35.38

Utilities

-45.72

19.99

15.21

31.43

17.58

13.15

33.69

2.09

1.11

88.29

56.32

43.5

29.47

Real Estate

-7.33

35.08

40.71

-13.83

42.36

36

17.67

7.88

6.67

18.14

50.54

51.8

-2.43

Energy: P/FCF Avg starts in 2000 - Utilities: P/FCF starts in 2004 - Real Estate: Avg start in 2006

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

-0.49

14.44

14.93

Cons.Disc.

3.11

20.45

17.34

Cons.Stap.

-2.90

21.16

24.06

Energy

-24.77

-9.88

14.89

Financials

-2.78

9.75

12.53

Healthcare

-2.76

14.84

17.6

Industrials

3.88

20.83

16.95

I.T. & Tel.

3.72

16.83

13.11

Materials

3.92

17.81

13.89

Utilities

-2.27

9.08

11.35

Real Estate

2.21

9.04

6.83

Q-score chart

Relative momentum

The next table and chart show the return in 1 month and 1 year for all sectors, represented by their respective SPDR ETFs (including dividends).

sector

ETF

1-month return

1-year return

All

SPY

1.22%

22.27%

Cons.Disc.

XLY

1.83%

18.58%

Cons.Stap.

XLP

2.12%

9.29%

Energy

XLE

-3.43%

31.41%

Financials

XLF

0.08%

40.47%

Healthcare

XLV

1.46%

10.48%

Industrials

XLI

1.05%

28.75%

I.T. & Tel.

XLK

3.53%

27.05%

Materials

XLB

2.68%

29.36%

Utilities

XLU

0.56%

8.96%

Real Estate

XLRE

-0.99%

8.75%

Interpretation

S&P 500 companies as a group look overpriced by about 25%, with a quality factor close to the historical average.

Since last month:

  • The S&P 500 went up 1.2% in one month.
  • The V-score has deteriorated by 3.4%.
  • All sectors went up in price except Energy and Real Estate.
  • The leading sectors have been Technology and Materials.
  • Technology went up more than 3%, whereas Energy went down more than 3%.
  • V-score has improved for Energy, Financials, Technology and deteriorated in other sectors.
  • Q-score has improved in Energy, Financials, Industrials, is stable in Materials, Utilities, Real Estate and deteriorated elsewhere.

Healthcare and Technology are very close to fair value regarding my metrics. Technology is better than its historical average in quality (measured by ROE). Consumer Discretionary and Real Estate are slightly overpriced and above the baseline in quality. The worst sector in valuation and also in quality is Energy, with a note of caution: it is strongly dependent on oil price, whose variations impact fundamental factors with a delay of at least one quarter. Utilities, Industrials, Materials, Consumer Staples and Financials look overpriced by 27% to 48%. Among them, only Industrials and Materials are above the baseline in quality.

In the next days I will publish top-down articles with data in all industries and a list of stocks to consider in every sector. All the lists together have returned about 25% in 2016. If you want to stay informed of updates on this topic, 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.

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.