Energy And Materials Dashboard - Update

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About: Energy Select Sector SPDR ETF (XLE), Includes: ALB, ASIX, BLL, CC, COG, FCX, IFF, IP, LYB, NEM, PBF, REGI, SLGN, STLD, SXC, XLB
by: Fred Piard
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

Stocks in energy and materials have been badly hit in October. As a result, 4 industries are significantly underpriced for 2 out of 3 valuation ratios reported here: oil/gas, metals/mining, paper/wood and constuction materials. These groups are also above or close to their historical average in profitability measured by return on equity. Chemicals look moderately overpriced and above its historical baseline in profitability. Energy equipment/services has mixed metrics: price/earnings is fair, price/sales looks great, but price/free cash flow and return on equity ratios are bad. Packaging is significantly overvalued, but profitability is above the historical average and may partly justify overpricing.

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 all industries, the most in oil/gas.

  • P/S has improved in all industries, the most in packaging and construction materials.

  • P/FCF has improved in most industries, but deteriorated in energy equipment/services and paper/wood.

  • ROE has improved in energy, paper/wood and deteriorated in packaging.

  • The Select Sector SPDR ETFs in materials (XLB) and energy (XLE) have lagged the SPDR S&P 500 ETF by 0.8% and 5.7%.

  • The five S&P 500 stocks in energy and materials with the best momentum in 1 month are Albemarle Corp. (ALB), Ball Corp. (BLL), Cabot Oil & Gas Corp. (COG), International Flavors & Fragrances Inc. (IFF), and Newmont Mining Corp. (NEM).

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 (excluding extraordinary items), price/sales and price/free cash flow. The 10 companies with the highest return on equity are kept in the final selection. Quantitative Risk & Value members have every month an early access to the cheap stock lists in all sectors before they are published in free-access articles. This is not investment advice. Do your own research before buying.

PBF

PBF Energy

OILGASFUEL

REGI

Renewable Energy Group Inc.

OILGASFUEL

ASIX

AdvanSix Inc.

CHEM

CC

Chemours Co.

CHEM

LYB

LyondellBasell Industries NV

CHEM

FCX

Freeport-McMoRan Inc.

METAL

STLD

Steel Dynamics Inc.

METAL

SXC

SunCoke Energy Inc.

METAL

IP

International Paper Co.

PACKAGING

SLGN

Silgan Holdings Inc.

PACKAGING

Detail of valuation and quality indicators in energy and materials on 11/5/2018

I take 4 aggregate industry factors: 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

Equip./Sces

23.37

24.2

3.44%

1.11

1.73

35.74%

53.53

35.34

-51.47%

-5.87

7.34

-13.21

Oil/Gas

14.29

18.53

22.87%

2.13

3.35

36.43%

31.19

29.03

-7.46%

3.84

4.47

-0.63

Chemicals

20.01

18.48

-8.30%

1.45

1.21

-20.17%

22.91

25.37

9.69%

11.47

6.74

4.73

Construction Materials

17.11

21.44

20.20%

1.44

1.16

-24.51%

36.14

40.5

10.77%

12.13

5.77

6.36

Packaging

20.17

17.96

-12.31%

0.94

0.61

-54.16%

30.82

20.09

-53.41%

20.23

8.34

11.89

Metals/Mining

16.93

19.83

14.61%

1.79

2.65

32.53%

32.44

25.53

-27.07%

-4.02

-8.6

4.58

Paper/Wood

11.96

21.27

43.76%

0.76

0.72

-5.67%

15.26

22.81

33.10%

13.68

4.99

8.69

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 the benchmark in 1 month.

Chart by TradingView

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Disclosure: I am/we are long IP, SXC. 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.