S&P 500 Valuation Dashboard - Update

Summary

• A score in value and quality for every sector.
• Evolution since last month.
• The best and the worst sectors for these metrics.

This monthly series gives fundamental scores by sector for companies in the S&P 500 index (NYSEARCA:SPY). I follow chosen fundamental factors for every sector and compare them to a historical baseline, so as to create a synthetic dashboard with a Value Score (V-score) and a Quality Score (Q-score). You can find here data that may be useful in a top-down approach.

Methodology

• The median value of 4 valuation ratios is calculated for S&P 500 companies in each sector: Price/Earnings (P/E), Forward Price Earning for the current year (Fwd P/E), Price to sales (P/S), Price to free cash flow (P/FCF).

• It is compared in percentage to its own historical average. For example, a difference of 10% means that the current median ratio is 10% over- or under-priced relative to its historical average in the sector.

• The V-score of a sector is the average of differences in percentage for the 4 factors, multiplied by -1. The higher is the better.

• The Q-score is the difference between the current median ROE (return on equity) and its historical average. The higher is the better.

The choice of the valuation and quality ratios has been justified in previous articles. Among the simple, publicly available fundamental factors, they are the best predictors of future returns according to 17-year backtests. Median values are better reference data than averages for stock-picking. Each median is the middle point of a sector, which can be used to separate good and bad elements. A median is also less sensitive to outliers.

Sector valuation on 3/1/2018

The next table reports the 4 valuation factors. There are 3 columns for each factor: the current median value, the historical average ("Avg.") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference in percentage ("%Hist"). The first column "V-score" shows the value score as defined above.

	V-score	P/E	Avg	%Hist	Fwd P/E	Avg	%Hist	P/S	Avg	%Hist	P/FCF	Avg	%Hist
All	-30.63	23.06	19.18	20.22	15.98	14.83	7.76	2.56	1.58	61.89	32.76	24.7	32.64
Cons.Disc.	-18.17	18.84	18.7	0.74	15.03	14.56	3.20	1.52	1.12	35.91	31.25	23.52	32.85
Cons.Stap.	-13.71	20.99	20.48	2.51	17.04	16.27	4.75	2.30	1.54	49.40	38.57	39.28	-1.81
Energy	-67.70	17.54	17.8	-1.46	18.10	14.38	25.85	2.44	1.94	25.77	98.09	30.59	220.65
Financials	-31.17	18.23	15.02	21.39	12.37	11.55	7.12	2.59	1.89	36.99	15.96	10.03	59.17
Healthcare	-9.35	30.92	23.76	30.14	15.21	16.85	-9.74	3.77	2.93	28.83	26.49	30.04	-11.82
Industrials	-41.11	25.61	18.75	36.56	16.82	14.52	15.86	1.94	1.24	56.85	39.82	25.66	55.18
I.T. & Tel.	-16.06	33.30	27.16	22.59	16.46	19.29	-14.69	4.06	2.72	49.28	27.85	26.02	7.04
Materials	-44.05	24.09	19.74	22.05	15.81	14.36	10.10	2.34	1.15	103.27	38.75	27.53	40.77
Utilities	-38.09	17.58	15.21	15.59	16.34	13.15	24.27	1.94	1.11	74.42	N/A	43.5	N/A
Real Estate	2.33	34.50	40.71	-15.26	34.34	36	-4.61	8.04	6.67	20.47	46.67	51.8	-9.90

Click to enlarge

Energy: P/FCF Avg. starts in 2000 - Utilities: P/FCF starts in 2004 - Real Estate: Avg. starts in 2006

V-score chart

Sector quality

The next table gives a score for each sector relative to its own historical average. Here, only one factor is accounted.

	Q-score (Diff)	Median ROE	Avg
All	-0.15	14.78	14.93
Cons.Disc.	4.65	21.99	17.34
Cons.Stap.	0.11	24.17	24.06
Energy	-7.36	7.53	14.89
Financials	-1.02	11.51	12.53
Healthcare	-4.61	12.99	17.6
Industrials	2.98	19.93	16.95
I.T. & Tel.	1.41	14.52	13.11
Materials	2.97	16.86	13.89
Utilities	-1.84	9.51	11.35
Real Estate	0.60	7.43	6.83

Click to enlarge

Q-score chart

Relative momentum

The next table and chart show the return in 1 month and 1 year for all sectors, represented by their respective SPDR ETFs (including dividends).

sector	ETF	1-month return	1-year return
All	SPY	-4.58%	17.11%
Cons.Disc.	XLY	-4.26%	22.06%
Cons.Stap.	XLP	-8.67%	-0.46%
Energy	XLE	-12.58%	-3.40%
Financials	XLF	-3.93%	19.56%
Healthcare	XLV	-7.83%	13.92%
Industrials	XLI	-4.33%	18.64%
I.T. & Tel.	XLK	-0.57%	32.21%
Materials	XLB	-5.89%	16.21%
Utilities	XLU	-2.64%	-2.10%
Real Estate	XLRE	-5.28%	-3.19%

Click to enlarge

Monthly Momentum:

Annual Momentum:

Interpretation

For median-based metrics, S&P 500 companies look overpriced by about 30%, with a quality factor close to the historical average.

Since last month:

• The S&P 500 went down by 4.6%.

• The V-score has improved by almost 9 percentage point.

• The most resistant sector in the current consolidation is Technology.

• The hardest hit sector is Energy.

• 4 sectors show a loss of 0.5% to 3.5% last 12 months: Energy, Real Estate, Utilities, Consumer Staples.

• V-Score has improved in all sectors, the most in Energy, Consumer Staples, Utilities.

• Q-Score has improved in Energy, Consumer Discretionary, Consumer Staples and deteriorated in Technology, Healthcare, Materials.

Real Estate looks fairly pricey; Healthcare is overpriced by less than 10%; Technology (including Telecom), Consumer Staples, Consumer Discretionary by less than 20%; other sectors by more than 30%. Energy stays the worst sector for both valuation and quality metrics. Consumer Discretionary, Technology, Industrials, and Materials are above their historical averages in quality. It may partly justify overpricing in these sectors. However, I think the systemic risk is more important than market valuation to manage a portfolio.

In the next weeks, I will write top-down articles with data at industry level for various sectors and stocks looking cheap in these sectors. All these "cheap stocks" together are the Dashboard List updated once a month for Quantitative Risk & Value members before a part is published in free-access articles.

Data are 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).

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.

I am net long in stocks.