This article series reports every month since 2015 a dashboard with sector metrics in the S&P 500 index (NYSEARCA:VOO, SPY, IVV).
Shortcut
If you are used to this dashboard series or if you are short of time, you can skip the first paragraphs and go to the charts. Reading everything once is necessary if you want to use the metrics for stock-picking purposes.
Our Base Metrics
We calculate the median value of five fundamental ratios in a sector: Earnings Yield ("EY"), Sales Yield ("SY"), Free Cash Flow Yield ("FY"), Return on Equity ("ROE"), Gross Margin ("GM"). All are calculated on trailing 12 months. For all these ratios, higher is better and negative is bad. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable when the “something” is close to zero or negative (for example, companies with negative earnings). We also calculate two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).
We use medians rather than averages because a median splits a set in a good half and a bad half. Capital-weighted averages are skewed by extreme values and the largest companies. Our metrics are designed for stock-picking rather than index investing.
Value and Quality Scores
We calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for technology in the table below is the 11-year average of the median Earnings Yield of S&P 500 tech companies .
We define the Value Score (VS) as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the
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