Valuation Dashboard: Energy And Materials - Update

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Includes: AVY, CF, EMN, FCX, FUL, KRA, LYB, OI, RYAM, SHW, SPY, STLD, TSO, VLO, WOR, XLB, XLE
by: Fred Piard

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, and gives a list of 10 stocks. Every month I update 8 lists like this one covering all sectors (some sectors are grouped). The 8 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.

Executive summary

Energy Equipment and Services companies have attractive valuation factors, but are the worst group in Energy and Material for profitability (measured by ROE). The valuations of all other industries are worse than historical averages, excepting a good price to free cash flow for Construction Materials. Packaging and Construction Materials have a profitability above historical average, which may partly justify overpricing. The less attractive group is Metal/Mining, with 4 valuation and quality factors worse than historical averages.

Since last month:

  • P/E has improved in Energy Equipments/Services and deteriorated elsewhere.
  • P/S is stable in Packaging, Construction Materials, Chemicals and deteriorated elsewhere.
  • P/FCF has improved in Energy, Paper/Wood and deteriorated elsewhere.
  • ROE has improved in Chemicals, Packaging, deteriorated in Metals/Miming and is stable elsewhere.
  • The SPDR Select Sector ETFs in Energy (XLE) and Materials (XLB) have respectively lagged the broad market by about 3% and outperformed it by about 1%
  • The five S&P 500 stocks in Energy and Materials with the best momentum in 1 month are Avery Dennison Corp (NYSE:AVY), CF Industries Holdings Inc (NYSE:CF), Freeport-McMoRan Inc (NYSE:FCX), LyondellBasell Industries (NYSE:LYB), Sherwin-Williams Co (NYSE:SHW). AVY hit an all-time high in February, and SHW did so in January.

Some cheap stocks in their industries

The stocks listed below are in the S&P 1500 index and are 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 results. This is not investment advice. Do your own research before buying.

EMN

Eastman Chemical Co

MATERIALS

CHEM

FUL

H.B. Fuller Co.

MATERIALS

CHEM

KRA

Kraton Corp

MATERIALS

CHEM

LYB

LyondellBasell Industries NV

MATERIALS

CHEM

OI

Owens-Illinois Inc.

MATERIALS

PACKAGING

RYAM

Rayonier Advanced Materials Inc

MATERIALS

CHEM

STLD

Steel Dynamics Inc

MATERIALS

MINING

WOR

Worthington Industries Inc.

MATERIALS

MINING

TSO

Tesoro Corp

ENERGY

OILGASFUEL

VLO

Valero Energy Corp

ENERGY

OILGASFUEL

Detail of Valuation and Quality indicators in Energy and Materials on 2/6/2017

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

Energy Equip.&Sces

21.15

24.2

12.60%

1.59

1.73

8.09%

20.14

35.34

43.01%

-19.44

7.34

-26.78

Oil/Gas/Fuel

21.04

18.53

-13.55%

3.33

3.35

0.60%

32.51

29.03

-11.99%

-15.25

4.47

-19.72

Chemicals

22.77

18.48

-23.21%

1.71

1.21

-41.32%

28.59

25.37

-12.69%

9.38

6.74

2.64

Construction Materials

31.21

21.44

-45.57%

1.66

1.16

-43.10%

30.58

40.5

24.49%

13.15

5.77

7.38

Packaging

26.5

17.96

-47.55%

1.1

0.61

-80.33%

28.19

20.09

-40.32%

22.73

8.34

14.39

Metals&Mining

42.09

19.83

-112.25%

3.99

2.65

-50.57%

30.35

25.53

-18.88%

-15.66

-8.6

-7.06

Paper&Wood

24.99

21.27

-17.49%

1

0.72

-38.89%

22.94

22.81

-0.57%

9.34

4.99

4.35

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 XLB and XLE with SPY over 1 month.

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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.

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