Financials And Real Estate Dashboard - Update

|
About: Financial Select Sector SPDR ETF (XLF), XLRE, Includes: AIG, AMP, BFS, CBRE, CINF, ECPG, EVR, MMI, PGR, RE, SYF, TRV, UVE, WDR
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

Consumer finance and mortgage REITs are undervalued relative to their historical averages in 3 valuation metrics. Capital markets and real estate management have mixed ratios: excellent in price/earnings and price/free cash flow, but bad in price/sales. Commercial banks and thrifts/mortgage look good in price/earnings, but overpriced combining all valuation ratios. Insurance is the most overpriced industry in these 2 sectors, and it is also below its historical average in profitability.

Since last month:

  • P/E has improved in consumer finance, insurance, mortgage REITs.
  • P/S has improved in commercial banks, mortgage REITs, and real estate management, and deteriorated in consumer finance.
  • P/FCF has improved in mortgage REITs and real estate management, and deteriorated in equity REITs.
  • ROE has deteriorated in consumer finance and real estate management.
  • The financial Select Sector SPDR ETF (XLF) is very close to the SPDR S&P 500 ETF in monthly return. The real estate Select Sector SPDR ETF (XLRE) has outperformed them by about 4 percentage points.
  • The 5 top momentum stocks on this period in the S&P 500 financial and real estate sectors are: American International Group Inc. (AIG), Cincinnati Financial Corp. (CINF), Progressive Corp. (PGR), Everest Re Group Ltd. (RE), and Travelers Companies Inc. (TRV), all in the insurance industry.

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. The list was published for subscribers at the beginning of the month based on data available at this time. This is not investment advice. Do your own research before buying.

AMP

Ameriprise Financial Inc.

CAPMARKET

EVR

Evercore Inc.

CAPMARKET

WDR

Waddell & Reed Financial Inc.

CAPMARKET

ECPG

Encore Capital Group Inc.

CONSUMERFIN

SYF

Synchrony Financial

CONSUMERFIN

PGR

Progressive Corp.

INSURANCE

UVE

Universal Insurance Holdings

INSURANCE

BFS

Saul Centers Inc.

REIT

CBRE

CBRE Group Inc.

REMGMT

MMI

Marcus & Millichap Inc.

REMGMT

Details of valuation and quality indicators in financials and real estate on 5/16/2019

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

Commercial Banks

13.09

15.24

14.09%

2.94

2.06

-42.90%

14.88

13.44

-10.72%

10.46

8.89

1.57

Thrifts/Mortgage*

15.67

20.66

24.17%

3.09

2.03

-52.16%

17.46

14.75

-18.39%

8.67

5.02

3.65

Consumer Finance*

11.86

13.15

9.79%

1.46

1.47

0.38%

7.47

8.22

9.10%

10.25

11.83

-1.58

Capital Markets*

15.81

18.07

12.53%

3.71

3.06

-21.35%

16.78

19.62

14.47%

10.29

7.89

2.40

Insurance

18.71

13.7

-36.60%

1.30

1.07

-21.05%

13.12

8.99

-45.97%

6.83

8.71

-1.88

Mortgage REITs**

12.46

17.01

26.77%

3.80

4.13

8.05%

36.94

48.8

24.30%

4.66

4.72

-0.06

Equity REITs**

35.24

35.51

0.76%

6.08

4.56

-33.39%

51.01

38.64

-32.01%

5.87

4.04

1.83

Real Estate Mngt**

19.86

31.19

36.33%

4.72

3.06

-54.23%

21.96

25.55

14.05%

4.59

-1.33

5.92

* 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

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 real estate funds not referred to in the article.