Energy And Materials Dashboard - Update

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About: Materials Select Sector SPDR ETF (XLB), XLE, Includes: APC, APD, BLL, CC, DNR, FANG, IP, LYB, MERC, NUE, REGI, SLGN, STLD, THE, VMC
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

Energy equipment services, oil/gas, metals/mining and paper/wood are significantly underpriced regarding historical averages. However, energy equipment/services are far below their baseline in profitability metrics, whereas paper/wood is above it. Chemicals look close to fair price. Packaging is significantly overpriced, but it is the best in profitability metrics, which may partly justify overpricing. The less attractive industry in these 2 sectors is construction materials, overpriced by 20% to 40% depending on valuation metrics and significantly below the profitability baseline.

Since last month:

  • P/E has improved in energy equipment/services, chemicals, packaging and deteriorated in construction materials.
  • P/S has improved in energy, chemicals, metals, packaging and deteriorated in paper/wood.
  • P/FCF has improved in energy, metals and deteriorated in construction materials, paper/wood.
  • ROE is stable in metals and deteriorated elsewhere.
  • The SPDR Select Sector ETF in energy (XLE) and materials (XLB) have lagged the SPDR S&P 500 ETF by about 2.7% and 4%.
  • The five S&P 500 stocks in energy and materials with the best momentum in 1 month are Anadarko Petroleum Corp. (APC), Air Products and Chemicals Inc. (APD), Ball Corp. (BLL), Diamondback Energy Inc. (FANG), Vulcan Materials Co. (VMC).

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. The list was published for subscribers at the beginning of the month based on data available at this time.

DNR

Denbury Resources Inc.

OILGASFUEL

REGI

Renewable Energy Group Inc.

OILGASFUEL

CC

Chemours Co. (The)

CHEM

LYB

LyondellBasell Industries NV

CHEM

MERC

Mercer International Inc.

FORESTRY

NUE

Nucor Corp.

METAL

STLD

Steel Dynamics Inc.

METAL

IP

International Paper Co.

PACKAGING

SLGN

Silgan Holdings Inc.

PACKAGING

Detail of valuation and quality indicators in energy and materials on 5/15/2019

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

En. Equip./Sces

20.42

24.2

15.61%

0.85

1.73

50.86%

22.22

35.34

37.12%

-9.19

7.34

-16.53

Oil/Gas

13.23

18.53

28.61%

1.65

3.35

50.76%

22.02

29.03

24.15%

1.57

4.47

-2.90

Chemicals

17.74

18.48

4.02%

1.42

1.21

-17.00%

25.17

25.37

0.81%

8.68

6.74

1.94

Construction Materials

30.24

21.44

-41.05%

1.49

1.16

-28.36%

49.48

40.5

-22.18%

-1.91

5.77

-7.68

Packaging

17.57

17.96

2.14%

0.98

0.61

-61.36%

27.92

20.09

-38.97%

15.80

8.34

7.46

Metals/Mining

12.84

19.83

35.26%

2.08

2.65

21.34%

17.11

25.53

32.99%

-15.63

-8.6

-7.03

Paper/Wood

13.17

21.27

38.09%

0.77

0.72

-7.21%

16.24

22.81

28.82%

11.90

4.99

6.91

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

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.