Valuation Dashboard: Consumer Discretionary - Update

| About: Consumer Discretionary (XLY)

Summary

Valuation metrics in Consumer Discretionary.

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 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.

Executive summary

Automobiles and General Retail are underpriced. General Retail looks the most attractive group considering my metrics. Education Services, Home Improvement Retail, Movies/Entertainment and Internet/Direct Retail look close to fair value. Other industries in Consumer Discretionary are less attractive. The most overpriced group is Distributors. Consumer Discretionary industries are globally above or close to their historical averages in profitability measured by ROE, except Education Services, which is significantly below.

Since last month:

  • P/E has improved for Internet/Direct Retail and deteriorated for Consumer Electronics, Education Services.
  • P/S has deteriorated for Internet/Direct Retail, Restaurants, Apparel/Luxury and is stable elsewhere.
  • P/FCF has improved for Internet/Direct Retail, General Retail, Apparel/Luxury, Auto Parts and deteriorated in Distributors, Consumer Electronics, Automobiles.
  • ROE has improved for Auto Parts, Distributors, General Retail and deteriorated in Automobiles, Leisure Products.
  • The SPDR Select Sector ETF (NYSEARCA:XLY) has lagged the SPDR S&P 500 ETF (NYSEARCA:SPY) by about 1%.
  • The five S&P 500 consumer discretionary stocks with the best momentum in one month are Foot Locker Inc. (NYSE:FL), Hasbro Inc. (NASDAQ:HAS), Lennar Corp. (NYSE:LEN), Lowe's Companies Inc. (NYSE:LOW), Tiffany & Co. (NYSE:TIF).

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. 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 Inc.

AUTOCOMPONENT

CTB

Cooper Tire & Rubber Co.

AUTOCOMPONENT

BYD

Boyd Gaming Corp.

HOSPITALITY

RUTH

Ruth's Hospitality Group Inc.

HOSPITALITY

OMC

Omnicom Group Inc.

MEDIA

VIAB

Viacom Inc.

MEDIA

HSNI

HSN Inc.

RETAILMAIL

BBBY

Bed Bath & Beyond Inc.

RETAILSPECIAL

BBY

Best Buy Co. Inc.

RETAILSPECIAL

ODP

Office Depot Inc.

RETAILSPECIAL

Detail of Valuation and Quality indicators in Consumer Discretionary on 3/6/2017

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. 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 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

Auto Parts/Equipment

17.06

15.33

-11.29%

0.85

0.62

-37.10%

21.93

21.23

-3.30%

12.42

3.9

8.52

Automobiles

13.31

17.67

24.67%

1.17

1.06

-10.38%

19.3

21.97

12.15%

19.74

0.21

19.53

Home Improvement Retail

17.94

15.46

-16.04%

0.53

0.59

10.17%

17.72

16.33

-8.51%

12.04

5.3

6.74

Leisure Products

17.84

17.82

-0.11%

1.11

0.84

-32.14%

17.65

22.05

19.95%

14.32

2.63

11.69

Apparel, Accessories, Luxury

16.89

16.34

-3.37%

0.99

0.71

-39.44%

16.03

17.23

6.96%

10.63

7

3.63

Restaurants

24.78

21.67

-14.35%

1.42

1.04

-36.54%

28.52

24.18

-17.95%

8.56

4.51

4.05

Education Services*

23.88

21.49

-11.12%

1.38

1.4

1.43%

20.6

18.64

-10.52%

4.01

11.35

-7.34

Cable & Satellite

24.66

23.31

-5.79%

1.53

1.55

1.29%

18.07

19.9

9.20%

6.65

-3.45

10.1

Distributors

20.48

14.32

-43.02%

**

0.48

**

20.06

16.28

-23.22%

2.11

3.18

-1.07

Internet/Direct Retail

46.65

37.37

-24.83%

1.64

1.8

8.89%

33.5

32.11

-4.33%

-2.01

-14.7

12.69

General Retail

16.52

19.41

14.89%

0.34

0.48

29.17%

14.5

26.81

45.92%

7.51

10.44

-2.93

Consumer Electronics

15.64

17.95

12.87%

0.8

0.56

-42.86%

19.08

21.87

12.76%

9.43

9.85

-0.42

*Averages since 2005 - ** Outliers

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 XLY with SPY in one 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, BBY.

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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