Valuation Dashboard: Energy And Materials - Update
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
Integrated Oil/Gas looks close to fair price regarding valuation factors, but stays below the historical average and in negative territory for profitability measured by ROE. The Construction Materials industry is expensive for 2 valuation ratios, but has a Price to Free Cash Flow and a profitability (ROE) significantly better than historical averages. Other industries are even less attractive. The most overpriced groups according to valuation factors are Packaging and Paper/Wood, and the worst combination of valuation and profitability is Energy Equipment & Services. The energy sector's profitability will stay low as long as oil price stays low.
Since last month:
P/E has improved in Energy Equipment/Services, deteriorated in Construction Materials and is stable elsewhere.
P/S and P/FCF have improved in Metals/Mining and deteriorated elsewhere.
ROE is stable in most groups and deteriorated a bit in Metals/Mining and Packaging.
The SPDR Select Sector ETF in Energy (NYSEARCA:XLE) and Materials (XLB) have outperformed the SPDR S&P 500 ETF (SPY) by about 2% and 2.5%.
The five S&P 500 stocks in Energy and Materials with the best momentum in 1 month are CF Industries Holdings Inc (CF), Cabot Oil & Gas Corp (COG), Phillips 66 (PSX), Tesoro Corp (TSO), Valero Energy Corp (VLO).
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. 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. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.
Eastman Chemical Co (EMN) | CHEM |
Innophos Holdings Inc (IPHS) | CHEM |
Koppers Holdings Inc (KOP) | CHEM |
LyondellBasell Industries (LYB) | CHEM |
Rayonier Advanced Materials (RYAM) | CHEM |
Stepan Co (SCL) | CHEM |
Steel Dynamics Inc (STLD) | MINING |
Worthington Industries (WOR) | MINING |
Bemis Co (BMS) | PACKAGING |
Owens-Illinois (OI) | PACKAGING |
Detail of Valuation and Quality indicators in Energy and Materials on 7/5/2017
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 | 35.79 | 24.2 | -47.89% | 1.4 | 1.73 | 19.08% | 26.97 | 35.34 | 23.68% | -16.12 | 7.34 | -23.46 |
Intergrated Oil/Gas | 19.48 | 18.53 | -5.13% | 2.78 | 3.35 | 17.01% | 21.73 | 29.03 | 25.15% | -2.97 | 4.47 | -7.44 |
Chemicals | 26.67 | 18.48 | -44.32% | 1.73 | 1.21 | -42.98% | 30.13 | 25.37 | -18.76% | 8.9 | 6.74 | 2.16 |
Construction Materials | 30.36 | 21.44 | -41.60% | 1.88 | 1.16 | -62.07% | 32.16 | 40.5 | 20.59% | 11.51 | 5.77 | 5.74 |
Packaging | 23.9 | 17.96 | -33.07% | 1.19 | 0.61 | -95.08% | 30.15 | 20.09 | -50.07% | 21.89 | 8.34 | 13.55 |
Metals/Mining | 27.71 | 19.83 | -39.74% | 3.14 | 2.65 | -18.49% | 26.84 | 25.53 | -5.13% | -11.06 | -8.6 | -2.46 |
Paper/Wood | 27.08 | 21.27 | -27.32% | 1.07 | 0.72 | -48.61% | 41.27 | 22.81 | -80.93% | 8.61 | 4.99 | 3.62 |
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 in 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).
This article was written by
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I am an individual investor and an IT professional, not a finance professional. My writings are data analysis and opinions, not investment advice. They may contain inaccurate information, despite all the effort I put in them. Readers are responsible for all consequences of using information included in my work, and are encouraged to do their own research from various sources.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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