S&P 500 Valuation Dashboard - Update

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About: SPDR S&P 500 Trust ETF (SPY), Includes: XLB, XLC, 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.

GICS sectors have changed in 2016 (real estate added), then in September 2018 (communication services deeply modified: read here). Historical averages have been calculated as close to the current sector structure as we reasonably can so as to compare them with current data in the same sets of industries. For example, media companies have been excluded from the history of consumer discretionary and included in the history of communication.

Methodology

  • The median value of four 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 four 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 3/1/2019

The next table reports the four valuation factors. There are three 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

-24.42

21.01

19.18

9.52

15.67

14.83

5.66

2.59

1.58

63.89

29.29

24.7

18.59

Cs. Discretionary

-13.29

18.57

18.15

2.29

14.81

14.11

4.93

1.46

1.01

44.44

24.75

24.38

1.52

Cs. Staples

-22.04

20.26

20.48

-1.08

17.68

16.27

8.68

2.48

1.54

60.89

47.00

39.28

19.64

Energy

-13.51

15.96

17.8

-10.34

15.69

14.38

9.12

2.12

1.94

9.20

44.68

30.59

46.06

Financials

-10.02

13.07

15.02

-12.99

10.65

11.55

-7.76

2.45

1.89

29.44

13.18

10.03

31.39

Healthcare

-15.42

26.95

23.76

13.42

16.64

16.85

-1.25

4.00

2.93

36.61

33.92

30.04

12.92

Industrials

-19.52

19.19

18.75

2.33

15.07

14.52

3.80

1.64

1.24

32.51

35.78

25.66

39.46

Technology

-10.81

26.38

28.14

-6.25

17.26

19.29

-10.52

4.23

2.84

48.86

27.90

25.11

11.13

Communication

9.74

16.68

21.28

-21.60

16.91

17.09

-1.04

1.92

2.01

-4.51

23.21

26.31

-11.79

Materials

-20.60

24.29

19.74

23.03

14.18

14.36

-1.26

1.75

1.15

51.87

29.94

27.53

8.76

Utilities

-52.03

21.85

15.21

43.62

17.79

13.15

35.29

2.54

1.11

129.20

N/A

43.5

N/A

Real Estate

-9.30

36.32

40.71

-10.77

43.43

36

20.64

8.57

6.67

28.48

51.21

51.8

-1.14

Energy: P/FCF Avg starts in 2000; Utilities: P/FCF starts in 2004; and Real Estate: Avg starts 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

1.74

16.67

14.93

Cs. Discretionary

4.97

22.85

17.88

Cs. Staples

2.62

26.68

24.06

Energy

-5.32

9.57

14.89

Financials

-0.42

12.11

12.53

Healthcare

-2.91

14.69

17.6

Industrials

9.40

26.35

16.95

Technology

15.32

29.07

13.75

Communication

8.55

20.52

11.97

Materials

6.62

20.51

13.89

Utilities

-1.16

10.19

11.35

Real Estate

1.51

8.34

6.83

Q-score chart:

Relative Momentum

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

sector

ETF

1-month return

1-year return

All

SPY

5.80%

3.48%

Cs. Discretionary

XLY

4.25%

6.74%

Cs. Staples

XLP

4.36%

3.70%

Energy

XLE

4.42%

-1.57%

Financials

XLF

2.67%

-7.73%

Healthcare

XLV

3.75%

8.87%

Industrials

XLI

8.50%

0.06%

Technology

XLK

10.12%

4.70%

Communication

XLC

5.10%

N/A

Materials

XLB

2.72%

-7.52%

Utilities

XLU

7.12%

19.40%

Real Estate

XLRE

2.94%

19.41%

Monthly Momentum

Annual Momentum

Interpretation

For median-based metrics, S&P 500 companies look overpriced by about 24.4%, with a quality factor above the historical average.

Since last month:

  • The S&P 500 went up 5.8%.

  • The V-score has deteriorated by 3.8 percentage points.

  • The Q-score has improved a bit again.

  • Looking only at the median P/E, S&P 500 companies are overpriced by 9.5% relative to the average of 2000 to 2015.

  • All sectors have gained more than 2%. The top 3 are technology, industrials, and utilities with gains over 7%. Financials, real estate, and materials are lagging below 3%.

  • Utilities was the first sector to reach a new highest weekly closing price, measured on select sector SPDR ETFs (on 2/22/2019).

  • V-Score has improved in healthcare, energy, real estate and deteriorated in other sectors.

  • Q-Score has improved in technology, consumer staples, healthcare, industrials, real estate and deteriorated in energy, financials, communication, materials.

  • The one-year momentums in technology and consumer discretionary are not consistent with sector index components after the GICS changes of September 2018. They will be progressively normalized to be consistent again in September 2019.

Communication is underpriced by about 10%. Technology, financials, real estate are overpriced by about 10%; energy, consumer discretionary, healthcare by 13% to 16%; materials, industrials, consumer staples by 20% to 22%; and utilities by about 52%. Communication, technology, industrials, materials are far above their historical averages in quality metric. Energy is the worst performer in Q-score. Combining valuation and quality metrics, communication looks the most attractive sector and utilities the worst one.

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 long in 30+ stocks, among them some SPY components.