Financials And Real Estate Dashboard - Update

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About: Financial Select Sector SPDR ETF (XLF), Includes: AMG, CBOE, FAF, FII, HCP, IVR, PCH, PFG, RGA, SBAC, SYF, VTR, WD, WDR, WLTW, XLRE
by: Fred Piard

Summary

Valuation metrics in financials and real estate.

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.

Executive summary

Taking into account various metrics, mortgage REITs, consumer finance and capital markets look underpriced. The first 2 groups are above their historical average in profitability, whereas the latter is below it. Real estate management shows good ratios except a bad price/sales factor. Combining the 3 valuation metrics, equity REITs are moderately overpriced. The most overpriced groups are banks and insurance.

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 insurance.

  • P/S has improved in all industries, the most in banks and real estate management.

  • P/FCF has improved in all industries except mortgage REITs.

  • ROE has improved in insurance and deteriorated a bit in consumer finance.

  • The Financial Select Sector SPDR ETF (XLF) and the Real Estate Select Sector SPDR ETF (XLRE) have outperformed the SPDR S&P 500 ETF by 0.6% and 6.2%, respectively.

  • The 5 top momentum stocks on this period in the S&P 500 financial and real estate sectors are: Cboe Global Markets Inc. (CBOE), HCP Inc. (HCP), SBA Communications Corp. (SBAC), Ventas Inc. (VTR), Willis Towers Watson plc (WLTW).

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. Quantitative Risk & Value Members have an early access to the stock lists before they are published in free access articles. This is not investment advice. Do your own research before buying.

WD

Walker & Dunlop Inc.

BANKSNL

AMG

Affiliated Managers Group Inc.

CAPMARKET

FII

Federated Investors Inc.

CAPMARKET

WDR

Waddell & Reed Financial Inc.

CAPMARKET

SYF

Synchrony Financial

CONSUMERFIN

FAF

First American Financial Corp.

INSURANCE

PFG

Principal Financial Group Inc.

INSURANCE

RGA

Reinsurance Group of America Inc.

INSURANCE

IVR

Invesco Mortgage Capital Inc.

REITMORTG

PCH

PotlatchDeltic Corp.

REIT

Detail of valuation and quality indicators in financials and real estate 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), 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

Commercial Banks

16.18

15.24

-6.18%

3.26

2.06

-58.49%

17.58

13.44

-30.77%

9.24

8.89

0.35

Thrifts/Mortgage*

18.58

20.66

10.09%

3.14

2.03

-54.66%

15.67

14.75

-6.27%

7.13

5.02

2.11

Consumer Finance*

12.22

13.15

7.07%

1.33

1.47

9.66%

5.78

8.22

29.72%

7.89

11.83

-3.94

Capital Markets*

15.22

18.07

15.79%

3.69

3.06

-20.54%

16.00

19.62

18.43%

10.67

7.89

2.78

Insurance

17.45

13.7

-27.38%

1.28

1.07

-19.36%

13.65

8.99

-51.79%

8.25

8.71

-0.46

Mortgage REITs**

9.15

17.01

46.22%

4.19

4.13

-1.41%

44.35

48.8

9.13%

11.45

4.72

6.73

Equity REITs**

31.76

35.51

10.56%

5.58

4.56

-22.47%

47.49

38.64

-22.89%

6.03

4.04

1.99

Real Estate Management**

24.83

31.19

20.38%

4.57

3.06

-49.35%

21.69

25.55

15.10%

6.72

-1.33

8.05

* Averages since 2003 - ** Averages since 2006 -

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 XLF and XLRE with the benchmark in 1 month.

Chart by TradingView

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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.