Valuation Dashboard: Financials And Real Estate - Update

| About: Financial Select (XLF)

Summary

Valuation metrics in Financials and Real Estate sectors.

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. I update every month 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

Mortgage REITs and Consumer Finance look cheap relative to their own historical averages in 3 valuation ratios. The former is also above its baseline in profitability (measured by ROE). Retail REITs and Real Estate Management are attractive in Price/Earnings and ROE, but Price/Sales and Price/Free Cash Flow look bad. Diversified Banking and Insurance are the less attractive groups, with all valuation and quality factors worse than their historical averages.

Since last month:

  • P/E has improved in Mortgage REITs and deteriorated in Real Estate Services.
  • P/S and P/FCF have deteriorated in Real Estate Services and are stable elsewhere.
  • ROE has deteriorated in Investment Banks & Brokers, Real Estate Services and is stable elsewhere.
  • The Financial Select Sector SPDR ETF (XLF) and the Real Estate Select Sector SPDR ETF (XLRE) have underperformed the S&P 500 (SPY) respectively by 0.8% and 3% in 1 month.
  • The 5 top momentum stocks on this period in the S&P financial and real estate sectors are: Affiliated Managers Group Inc. (NYSE:AMG), Ameriprise Financial Inc (NYSE:AMP), Iron Mountain Inc (NYSE:IRM), Moody's Corp. (NYSE:MCO), S&P Global Inc (NYSE:SPGI). SPGI is about 2% below its all-time high.

Some cheap stocks in 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 10.1% in a 17-year simulation. The sector ETF XLF has an annualized return of only 2.24% on the same period. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

AFL

AFLAC Inc

INSURANCE

AMG

Affiliated Managers Group Inc.

CAPMARKET

AMP

Ameriprise Financial Inc

CAPMARKET

FITB

Fifth Third Bancorp

BANKCOMM

HMST

HomeStreet Inc

BANKSNL

MHLD

Maiden Holdings Ltd

INSURANCE

NAVI

Navient Corp

CONSUMERFIN

UIHC

United Insurance Holdings Corp

INSURANCE

WRLD

World Acceptance Corp

CONSUMERFIN

INN

Summit Hotel Properties Inc

REIT

Detail of Valuation and Quality indicators in Financials and Real Estate on 2/8/2017

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

Diversified Banks

18.25

15.24

-19.75%

3.64

2.06

-76.70%

24.38

13.44

-81.40%

8.68

8.89

-0.21

Thrifts & Mortgage Fin.*

21.15

20.66

-2.37%

3.27

2.03

-61.08%

23.62

14.75

-60.14%

6.53

5.02

1.51

Consumer Finance*

12.85

13.15

2.28%

1.45

1.47

1.36%

6.29

8.22

23.48%

8.91

11.83

-2.92

Investment Banks & Brokers*

21

18.07

-16.21%

3.8

3.06

-24.18%

16.22

19.62

17.33%

6.05

7.89

-1.84

Insurance

16.11

13.7

-17.59%

1.38

1.07

-28.97%

13.37

8.99

-48.72%

8.54

8.71

-0.17

Mortgage REITs**

12.56

17.01

26.16%

4.15

4.13

-0.48%

32.68

48.8

33.03%

7.66

4.72

2.94

Retail REITs**

32.63

35.51

8.11%

6.23

4.56

-36.62%

45.68

38.64

-18.22%

6.45

4.04

2.41

Real Estate Services**

30.63

31.19

1.80%

5.75

3.06

-87.91%

30.93

25.55

-21.06%

2.42

-1.33

3.75

* Averages since 2003 - ** Averages since 2006 - *** 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 XLF and XLRE with SPY in 1 month.

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 NAVI, 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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