XLI: Industrials Dashboard For August

Aug. 17, 2021 7:27 AM ETIndustrial Select Sector SPDR ETF (XLI)BA, BCC, CAT, DE, DOV, GD, GE, HII, HON, LMT, MATX, MMM, NOC, NSP, PH, RTX, SPY, UNP, UPS

Summary

  • A dashboard with metrics in industrial subsectors.
  • Value and quality scores, and their evolution since last month.
  • XLI fast facts.
  • A list of cheap stocks.
  • Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

industria 4.0: Un joven ingeniero trabaja en un brazo robótico
fotografixx/E+ via Getty Images

This monthly article series shows a dashboard with aggregate subsector metrics in industrials. It is also a top-down analysis of sector ETFs like the Industrial Select Sector SPDR ETF (NYSEARCA:XLI), whose largest holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each subsector: Earnings Yield ("EY"), Sales Yield ("SY"), Free Cash Flow Yield ("FY"), Return on Equity ("ROE"), Gross Margin ("GM"). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. 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 or non available when the "something" is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I 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 transportation in the table below is the 11-year average of the median Earnings Yield in transportation companies. The Value Score ("VS") is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score ("QS") is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance.

Current data

The next table shows the metrics and scores as of last week's closing. Columns stand for all the data named and defined above.

VS

QS

EY

SY

FY

ROE

GM

EYh

SYh

FYh

ROEh

GMh

RetM

RetY

Aerospace+Defense

-29.48

-8.77

0.0417

0.6412

0.0279

19.22

19.87

0.0585

0.8573

0.0426

20.60

22.29

2.26%

29.44%

Building+Equipment

-43.29

41.07

0.0265

0.2018

0.0210

12.85

35.56

0.0445

0.8888

0.0239

9.35

24.58

7.43%

76.92%

Machinery+Conglomerates

-27.85

8.98

0.0361

0.2906

0.0314

21.07

39.65

0.0504

0.5849

0.0330

18.78

37.49

2.92%

48.32%

Services+Distribution

-41.80

16.89

0.0267

0.2515

0.0211

27.78

49.24

0.0424

0.5212

0.0333

20.98

48.55

4.78%

43.42%

Transportation

-20.13

-17.00

0.0319

0.5424

0.0205

23.82

15.81

0.0541

0.6986

0.0199

22.03

27.32

-2.17%

38.97%

Value and Quality chart

The next chart plots the Value and Quality Scores by subsector (higher is better).

Chart: author; data: Portfolio123

Evolution since last month

Valuation has improved in transportation and deteriorated in building/equipment. Quality is unchanged or went a bit up depending on subsectors.

Chart: author; data: Portfolio123

Momentum

The next chart plots momentum data.

Chart: author; data: Portfolio123

Interpretation

Industrial subsectors are overvalued by 20% to 42% relative to 11-year averages. Overvaluation may be justified by an excellent quality score in the building/construction/equipment subsector and a good one in services/distribution. In transportation and aerospace/defense, both value and quality scores are significantly below the baseline. However, quality has improved a lot for transportation in the last two months.

XLI fast facts

The Industrial Select Sector SPDR ETF has been tracking the Industrial Select Sector Index since 12/22/1998. It has 74 holdings, an expense ratio of 0.12% and a distribution yield of 1.22%.

The next table shows the top 10 holdings with basic ratios and dividend yields. Their aggregate weight is 40% of portfolio value. The largest one weighs 5%, so the risk related to the top holdings is moderate.

Ticker

Name

Weight%

EPS growth %ttm

P/E ttm

P/E fwd

Yield%

HON

Honeywell International Inc.

5.06

-13.34

32.90

28.62

1.61

UNP

Union Pacific Corp.

4.76

9.19

25.92

22.69

1.88

UPS

United Parcel Service Inc.

4.41

39.35

27.65

17.32

2.10

RTX

Raytheon Technologies Corp.

4.16

N/A

60.48

21.47

2.34

BA

Boeing Co.

4.05

-204.31

N/A

N/A

0.00

DE

Deere & Co.

3.77

64.58

26.47

21.18

0.94

CAT

Caterpillar Inc.

3.76

6.93

27.40

21.38

2.03

MMM

3M Co.

3.65

15.22

19.73

19.87

2.95

GE

General Electric Co.

3.62

-132.54

N/A

52.44

0.31

LMT

Lockheed Martin Corp.

2.75

11.79

14.03

14.06

2.91

Ratios by Portfolio123.

Since January 1999, XLI has outperformed the S&P 500 (SPY) in total return (553% vs. 446%). The difference in annualized return is 85 bps (8.7% vs. 7.8%). XLI beats the broad index by 3.6 percentage points in the last 12 months:

Chart by Portfolio123.

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a transportation company with an Earnings Yield above 0.0319 (or price/earnings below 31.35) is in the better half of the subsector regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.

NSP

Insperity Inc.

BCC

Boise Cascade Co.

MATX

Matson Inc.

PH

Parker-Hannifin Corp.

DE

Deere & Co.

DOV

Dover Corp.

HII

Huntington Ingalls Industries Inc.

NOC

Northrop Grumman Corp.

GD

General Dynamics Corp.

It is a rotating list with a statistical bias toward excess returns on the long term, not the result of an analysis of each stock.

With the coming back of the Value investing style, QRV Dashboard List has beaten the market in the last few months. Members get updates on it and other time-tested strategies, plus risk indicators. Get started with a two-week free trial now.

This article was written by

Fred Piard profile picture
14.42K Followers
Data-driven portfolios and risk indicators.
Author of Quantitative Risk & Value and three books, I have been investing in systematic strategies since 2010. I have a PhD in computer science, an MSc in software engineering, an MSc in civil engineering and 30 years of professional experience in various sectors. My aim is making simple and efficient quantitative investing techniques available to my followers. Quantitative models can make investment decisions faster, reproducible and emotionless by focusing on relevant information in the middle of market noise. Moreover, models can be refined to meet specific risk tolerance and objectives. 

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I am an individual investor and an IT professional, not a finance professional. My writings are data analysis and opinions, not investment advice. They may contain inaccurate information, despite all the effort I put in them. Readers are responsible for all consequences of using information included in my work, and are encouraged to do their own research from various sources.

Disclosure: I/we have a beneficial long position in the shares of GD, LMT, MMM either through stock ownership, options, or other derivatives. 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.

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