Valuation Dashboard: Energy And Materials - Update

| About: Materials Select (XLB)

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 value and to its historical average in profitability measured by ROE. Metals/Mining is moderately overpriced and close to its profitability baseline. Data are mixed for Energy Equipment: P/S and P/FCF are good, P/E and ROE are very bad. Paper/Wood is also mixed: P/E and P/S are bad, P/FCF and ROE are good. Chemicals and Packaging are widely overvalued. The latter has a good profitability factor, which may partly justify overpricing.

Since last month:

  • P/E has improved in Energy Equipment and deteriorated in Construction Materials and Metals/Mining.

  • P/S has improved in Energy Equipment, Oil/Gas and Metals/Mining and deteriorated in Construction Materials and Paper/Wood.

  • P/FCF has improved in Oil/Gas, Packaging, Metals/Mining and Paper/Wood and deteriorated in Energy Equipment.

  • ROE has improved in Oil/Gas and deteriorated in Energy Equipment and Paper/Wood.

  • The SPDR Select Sector ETF in Energy (NYSEARCA:XLE) and the Materials ETF (NYSEARCA:XLB) have lagged the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) by about 4% and 1% respectively.

  • The five S&P 500 stocks in Energy and Materials with the best momentum in 1 month are International Flavors & Fragrances Inc (NYSE:IFF), Packaging Corp. Of America (NYSE:PKG), Sealed Air Corp. (NYSE:SEE), Valero Energy Corp. (NYSE:VLO) and WestRock Co. (NYSE:WRK).

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.

Par Pacific Holdings Inc. (PARR)

OILGASFUEL

Cabot Corp. (CBT)

CHEM

Eastman Chemical Co. (EMN)

CHEM

LyondellBasell Industries NV (LYB)

CHEM

Minerals Technologies Inc. (MTX)

CHEM

Stepan Co. (SCL)

CHEM

Freeport-McMoRan Inc. (FCX)

MINING

Steel Dynamics Inc. (STLD)

MINING

Worthington Industries Inc. (WOR)

MINING

Silgan Holdings Inc. (SLGN)

PACKAGING

Detail of valuation and quality indicators in energy and materials as on 12/7/2017

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) and 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

73.8

24.2

-204.96%

1.32

1.73

23.70%

18.21

35.34

48.47%

-15.19

7.34

-22.53

Integrated Oil/Gas

19.62

18.53

-5.88%

2.4

3.35

28.36%

27.76

29.03

4.37%

1.36

4.47

-3.11

Chemicals

26.02

18.48

-40.80%

1.71

1.21

-41.32%

35.15

25.37

-38.55%

8.62

6.74

1.88

Construction Materials

32.1

21.44

-49.72%

1.89

1.16

-62.93%

39.42

40.5

2.67%

-4.04

5.77

-9.81

Packaging

24.88

17.96

-38.53%

1.2

0.61

-96.72%

25.23

20.09

-25.58%

19.18

8.34

10.84

Metals/Mining

25.94

19.83

-30.81%

2.49

2.65

6.04%

25.39

25.53

0.55%

-9.56

-8.6

-0.96

Paper/Wood

27.38

21.27

-28.73%

1.19

0.72

-65.28%

17.05

22.81

25.25%

7.49

4.99

2.5

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).

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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