S&P 500 Dashboard For June

Summary

• A score in value, quality and momentum for every sector.
• Evolution since last month.
• The best and the worst sectors for these metrics.
• This idea was discussed in more depth with members of my private investing community, Quantitative Risk & Value. Get started today »

This monthly series gives fundamental scores by sector for companies in the S&P 500 index (VOO, SPY, IVV). 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.

Methodology

• The median value of 4 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 4 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.
• GICS sectors had major changes in 2016 (real estate) and in 2018 (communication). Historical averages have been calculated using the current sub-industry structure in the past when possible, so as to compare things that are comparable.

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 metrics on 6/2/2020

The next table reports the 4 valuation factors. There are 3 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	-25.38	22.46	19.18	17.09	18.24	14.83	22.99	2.31	1.58	46.15	28.48	24.7	15.31
Cs. Discretionary	-9.22	20.76	18.15	14.37	18.22	14.11	29.10	1.08	1.01	7.07	21.05	24.38	-13.66
Cs. Staples	-24.28	22.15	20.48	8.16	19.12	16.27	17.49	2.58	1.54	67.68	40.77	39.28	3.80
Energy	5.38	22.30	17.8	25.28	19.36	14.38	34.61	0.85	1.94	-56.13	22.86	30.59	-25.29
Financials	11.32	10.86	15.02	-27.69	10.84	11.55	-6.11	1.69	1.89	-10.47	9.93	10.03	-1.01
Healthcare	-31.47	33.87	23.76	42.56	19.39	16.85	15.05	4.24	2.93	44.62	37.14	30.04	23.65
Industrials	-17.92	20.10	18.75	7.17	18.05	14.52	24.30	1.67	1.24	34.56	27.11	25.66	5.65
Technology	-23.83	27.68	28.14	-1.62	20.30	19.29	5.21	4.82	2.84	69.55	30.68	25.11	22.16
Communication	5.78	15.84	21.28	-25.56	21.53	17.09	25.98	1.73	2.01	-13.80	23.74	26.31	-9.75
Materials	-16.05	20.67	19.74	4.72	16.82	14.36	17.13	1.57	1.15	36.33	29.19	27.53	6.01
Utilities	-58.46	22.46	15.21	47.65	17.39	13.15	32.25	2.82	1.11	153.93	N/A	43.5	N/A
Real Estate	-28.39	29.16	40.71	-28.38	46.62	36	29.50	8.12	6.67	21.67	98.82	51.8	90.77

Click to enlarge

Energy: P/FCF Avg starts in 2000 - Utilities: P/FCF too volatile to be relevant - Real Estate: Avg start in 2006

V-score chart:

Sector quality metrics

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	-1.27	13.66	14.93
Cs. Discretionary	1.47	19.35	17.88
Cs. Staples	-2.90	21.16	24.06
Energy	-15.21	-0.32	14.89
Financials	-2.14	10.39	12.53
Healthcare	0.05	17.65	17.6
Industrials	4.32	21.27	16.95
Technology	14.55	28.30	13.75
Communication	2.59	14.56	11.97
Materials	-0.38	13.51	13.89
Utilities	-1.43	9.92	11.35
Real Estate	0.58	7.41	6.83

Click to enlarge

Q-score chart:

Momentum

The next table and chart show the return in 1 month and 1 year for all sectors, represented by their respective SPDR ETFs (including dividends).

sector	ETF	1-month return	1-year return
All	SPY	5.19%	13.27%
Cs. Discretionary	XLY	7.52%	14.70%
Cs. Staples	XLP	2.37%	10.22%
Energy	XLE	3.79%	-27.34%
Financials	XLF	3.91%	-6.77%
Healthcare	XLV	2.27%	19.68%
Industrials	XLI	5.62%	-3.75%
Technology	XLK	7.14%	38.31%
Communication	XLC	8.67%	17.17%
Materials	XLB	7.61%	8.32%
Utilities	XLU	5.48%	7.21%
Real Estate	XLRE	4.19%	0.14%

Click to enlarge

Monthly Momentum:

Annual Momentum:

Interpretation

For median-based metrics, S&P 500 companies look overpriced by 25.4%, with a note of caution: the impact of COVID-19 is still unknown. About 95% of S&P 500 companies have reported Q1 earnings, but this takes into account only a few weeks of global lockdowns (until the end of March).

Since last month:

• The S&P 500 went up by 5.2%.
• The V-score has deteriorated by about 13 percentage points.
• The Q-score fell by 0.7 point (and 1.7 in 2 months). It is about 1 point below the historical baseline.
• The V-score has deteriorated in all sectors.
• The Q-score has improved in technology and consumer staples, it is stable in industrials and healthcare, and it has deteriorated elsewhere.
• All sectors went up in 1 month. Communication, materials, consumer discretionary, technology are leading with gains between 7% and 9%. Healthcare and consumer staples are lagging with a bit more than 2%.
• Looking at 1-year total returns, the broad index is above 13%. Technology is leading by far at 38%. Energy is lagging with a loss of 27%. Industrials and financials are in loss, real estate is at break-even. Other sectors are in positive territory.

According to these metrics, financials, energy and communication services are underpriced by 5% to 11%. However, energy is far below the baseline in quality. It is the only sector with a negative median return-on-equity. Consumer discretionary, materials, industrials are overvalued by 9% to 18%; healthcare, technology, consumer staples, real estate by 24% to 32%; utilities by almost 60%. Combining valuation and quality metrics, communication and technology are the most attractive sectors.

Analyst’s 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.