S&P 500 Valuation Dashboard - Update

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About: SPDR S&P 500 Trust ETF (SPY), Includes: XLB, XLE, XLF, XLI, XLK, XLP, XLRE, XLU, XLV, XLY
by: Fred Piard
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 (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 table on 8/1/2018

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

-31.50

22.38

19.18

16.66

16.52

14.83

11.37

2.66

1.58

68.46

31.99

24.7

29.52

Cons.Disc.

-19.59

18.83

18.7

0.70

14.86

14.56

2.03

1.65

1.12

47.72

30.09

23.52

27.92

Cons.Stap.

-13.42

20.55

20.48

0.36

16.97

16.27

4.29

2.30

1.54

49.25

39.20

39.28

-0.22

Energy

-33.58

18.99

17.8

6.70

17.85

14.38

24.14

2.85

1.94

46.81

47.92

30.59

56.66

Financials

-33.95

15.35

15.02

2.18

11.96

11.55

3.51

2.73

1.89

44.60

18.60

10.03

85.49

Healthcare

-24.32

35.19

23.76

48.12

17.20

16.85

2.10

4.11

2.93

40.44

32.02

30.04

6.60

Industrials

-31.14

22.66

18.75

20.84

17.07

14.52

17.55

1.76

1.24

42.03

36.99

25.66

44.15

I.T. & Tel.

-22.50

33.51

27.16

23.40

17.49

19.29

-9.34

4.47

2.72

64.20

29.08

26.02

11.77

Materials

-39.97

23.30

19.74

18.02

15.82

14.36

10.18

2.02

1.15

75.77

42.93

27.53

55.93

Utilities

-36.67

19.31

15.21

26.99

17.25

13.15

31.18

2.09

1.11

88.50

17.83

43.5

N/A

Real Estate

-5.89

36.53

40.71

-10.27

40.66

36

12.94

8.37

6.67

25.42

49.46

51.8

-4.52

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

V-score chart

Sector quality table

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

0.42

15.35

14.93

Cons.Disc.

5.43

22.77

17.34

Cons.Stap.

2.63

26.69

24.06

Energy

-5.50

9.39

14.89

Financials

-0.12

12.41

12.53

Healthcare

-4.20

13.40

17.6

Industrials

4.82

21.77

16.95

I.T. & Tel.

6.06

19.17

13.11

Materials

4.08

17.97

13.89

Utilities

-2.23

9.12

11.35

Real Estate

0.50

7.33

6.83

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

3.70%

16.14%

Cons.Disc.

XLY

1.80%

23.32%

Cons.Stap.

XLP

3.96%

-0.52%

Energy

XLE

1.55%

19.71%

Financials

XLF

5.11%

13.28%

Healthcare

XLV

6.55%

12.98%

Industrials

XLI

7.39%

14.65%

I.T. & Tel.

XLK

2.09%

25.82%

Materials

XLB

2.86%

11.38%

Utilities

XLU

1.60%

2.57%

Real Estate

XLRE

1.04%

4.76%

Monthly Momentum:

Annual Momentum:

Interpretation

For median-based metrics, S&P 500 companies look overpriced by about 31%, with a quality factor close to the historical average.

Since last month:

  • The S&P 500 went up 3.7%.

  • The V-score has deteriorated by 1.2 percentage point.

  • The Q-score is stable.

  • Industrials, healthcare and financials were the best performing sectors.

  • Real estate has lagged the pack, but no sector is in loss.

  • V-Score has improved in energy, consumer discretionary, real estate, is stable in utilities and deteriorated elsewhere.

  • Q-Score has improved in consumer discretionary, industrials, materials, deteriorated in consumer staples, healthcare, and is stable elsewhere.

Real estate is close to fair price; consumer staples and consumer discretionary are overpriced by 10% to 20%; healthcare and technology by 20% to 25%; other sectors by 30% to 40%. Energy has improved in valuation metric and materials becomes the most overpriced sector, followed by utilities. Consumer discretionary, consumer staples, technology, industrials, materials are significantly above their historical averages in quality metric. It may partly justify overpricing in these sectors. Energy stays the worst performer regarding Q-score, followed by healthcare. Anyway, 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.

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.

Additional disclosure: I am net long in stocks.