Utilities Dashboard - Update
Summary
- Valuation metrics in utilities.
- Evolution since last month.
- A list of stocks looking cheap in their industries.
- Members of my private investing community, Quantitative Risk & Value, receive access to my breaking news coverage of this idea. Get started today >>
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
All industries are overvalued in utilities, and profitability doesn’t justify it. The only valuation factor reported below that looks better than historical averages is the price/sales ratio of power producers/traders. However, this group is also the worst for the profitability metric, both in absolute value and relative to its historical baseline. Combining 2 valuation factors, electric utilities and multi-utilities are the most overpriced industries in the sector.
Anyway, I think systemic risk is more important than market valuation to manage a portfolio (click here to learn more about it). Since last month:
P/E has improved in water utilities and deteriorated in electric utilities and power producers/energy traders.
P/S has improved in electric utilities, gas and water, and deteriorated in multi-utilities.
ROE is stable in all groups except a deterioration in power producers/energy traders.
The Utilities Select Sector SPDR ETF (NYSEARCA:XLU) has lagged the SPDR S&P 500 ETF by 3.3%.
In this period, the best performing S&P 500 Utilities stocks are AES Corporation (AES), DTE Energy (DTE), Edison International (EIX), NRG Energy Inc. (NRG), and Southern Co. (SO).
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 and price/sales. The 10 companies with the highest return on equity are kept in the final selection. I update every month several lists like this in various sectors. Quantitative Risk & Value Members have an early access to these lists before they are published in free articles. Click here to read about performances. This is not investment advice. Do your own research before buying.
Exelon Corp. | UTILELECTRIC | |
Xcel Energy Inc. | UTILELECTRIC | |
New Jersey Resources Corp. | UTILGAS | |
Spire Inc. | UTILGAS | |
Southwest Gas Corp. | UTILGAS | |
UGI Corp. | UTILGAS | |
Black Hills Corp. | UTILMULTI | |
CenterPoint Energy Inc. | UTILMULTI | |
DTE Energy Co. | UTILMULTI | |
MDU Resources Group Inc. | UTILMULTI |
Detail of valuation and quality indicators in utilities on 8/3/2018
I take 3 aggregate industry factors: price/earnings (P/E), price to sales (P/S), 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 3 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 | ROE | Avg | D-ROE | |
Electric Utilities | 24.70 | 15.94 | -54.93% | 2.20 | 1.22 | -80.30% | 8.58 | 10.43 | -1.85 |
Gas Utilities | 20.15 | 17.24 | -16.89% | 1.84 | 0.97 | -89.88% | 12.55 | 11.49 | 1.06 |
Multi-Utilities | 20.52 | 16.59 | -23.67% | 2.12 | 0.95 | -123.49% | 10.57 | 9.48 | 1.09 |
Water Utilities | 31.69 | 23.68 | -33.83% | 5.29 | 3.94 | -34.27% | 9.25 | 7.96 | 1.29 |
Ind.Power Prod./Energy Traders* | 48.55 | 34.9 | -39.10% | 2.86 | 4.16 | 31.18% | -21.39 | -5.15 | -16.24 |
* Averages since 2005
The following charts give an idea of the current status of 2 valuation factors (P/E, P/S) 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:
ROE relative to historical average:
Momentum
The next chart compares the price action of XLU with the benchmark in 1 month.
Chart by TradingView
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