SPLG: S&P 500 November Dashboard

Summary

• A dashboard with metrics of value, quality and momentum in all sectors.
• Value and quality scores relative to historical averages.
• Evolution since last month.
• The best and the worst sectors in value, quality and momentum.
• Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

Worawut Prasuwan/iStock via Getty Images

About SPLG

This monthly article series reports sector metrics in the S&P 500 index. It is also a top-down review of all funds tracking it. Among them, the SPDR Portfolio S&P 500 ETF (NYSEARCA:SPLG), launched in November 2005, is less popular than the SPDR S&P 500 Trust ETF (SPY). However, it has a lower expense ratio (0.03% vs. 0.0945%) and a lower share price, offering more flexibility to investors who can’t trade fractional shares. It has about $13B of assets under management and an average daily volume of about 2.4 million shares/day. SPLG pays quarterly dividends.

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 in every 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). I also calculate two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer 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. As a consequence, these metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

Historical baselines are calculated as the averages on a look-back period of 11 years for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh. 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.

The Value Score "VS" is 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).

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, except in energy and utilities where the Free Cash Flow Yield is ignored to avoid some inconsistencies. A floor of -100 is set for VS and QS when the calculation goes below this value. It may happen when metrics in a sector are very bad.

Current data

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

	VS	QS	EY	SY	FY	ROE	GM	EYh	SYh	FYh	ROEh	GMh	RetM	RetY
All	-28.08	10.18	0.0349	0.2880	0.0253	16.65	48.44	0.0465	0.4748	0.0316	14.60	45.58	5.02%	42.63%
Cs. Discretionary	-26.79	11.97	0.0361	0.4026	0.0291	26.26	35.14	0.0478	0.6971	0.0337	20.50	36.66	5.96%	47.54%
Cs. Staples	-2.94	6.78	0.0419	0.4817	0.0262	27.93	38.67	0.0461	0.5210	0.0243	23.30	41.28	2.36%	24.17%
Energy	-34.76	-23.48	0.0090	0.4255	0.0260	2.31	44.07	0.0174	0.5403	-0.0187	4.81	41.94	10.58%	127.57%
Financials	-22.96	24.24	0.0745	0.3110	0.0417	14.00	80.57	0.0670	0.4812	0.0754	10.24	72.15	5.24%	72.55%
Healthcare	-31.82	9.10	0.0266	0.2098	0.0281	18.32	65.66	0.0394	0.3210	0.0392	16.25	62.26	2.13%	31.81%
Industrials	-36.19	10.72	0.0308	0.3070	0.0240	24.03	37.07	0.0483	0.6140	0.0309	19.88	36.86	6.86%	44.74%
Technology	-40.23	18.51	0.0264	0.1471	0.0268	26.75	64.41	0.0419	0.3035	0.0395	20.02	62.27	8.18%	52.96%
Communication	-34.92	-4.13	0.0275	0.3392	0.0318	14.96	55.46	0.0499	0.5388	0.0412	16.50	54.87	-1.96%	26.42%
Materials	1.41	9.69	0.0431	0.4347	0.0365	18.32	38.12	0.0448	0.6426	0.0260	16.29	35.66	2.90%	31.54%
Utilities	-26.56	8.22	0.0454	0.3679	-0.0621	9.95	44.03	0.0534	0.5947	-0.0430	9.73	38.58	3.79%	10.54%
Real Estate	-20.60	10.33	0.0181	0.0843	0.0052	6.85	65.74	0.0197	0.1188	0.0069	5.70	65.42	6.24%	52.48%

Click to enlarge

Score charts

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

Chart: author; data: Portfolio123

Score variations since last month:

Chart: author; data: Portfolio123

Momentum chart:

Chart: author; data: Portfolio123

Interpretation

A hypothetical S&P 500 “median” company is overvalued by about 28% relative to average valuation metrics since 2010. The quality score is about 10% above the baseline. We can translate median yields in their inverse ratios:

• Price/Earnings: 28.65
• Price/Sales: 3.47
• Price/Free Cash Flow: 39.53

Consumer staples and materials are the most attractive sectors in regard to fundamental data: they are close to historical averages in valuation and above them in quality. Other sectors are overvalued by 20% to 40% relative to 11-year averages. Consumer staples, consumer discretionary, financials, utilities and real estate are less overvalued than the broad index. All sectors except energy and communication services are above the quality baseline. In technology and financials, an excellent quality score may partly offset overvaluation. Energy still looks the worst sector regarding valuation and quality metrics, but it has improved a lot in the last few months. The median earnings yield (EY) and return on equity (ROE) of S&P 500 energy companies came back in positive territory two months ago, meaning at least half of them are profitable in trailing 12 month metrics. Moreover, it has been the best performing sector by far in the last twelve months, with a median return of 127.6%.

SPLG and the S&P 500 have gained 39.2% in 12 months, but the momentum measured in median return is 42.6% and the equal-weight average is 46.3% (measured on RSP). It is a clue that the market was not driven by mega caps during this period. Financials, energy and technology have the best 12-month momentum measured in median return. Consumer staples and utilities have been lagging behind.

We use the table above 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 that a large consumer staples company with an Earnings Yield above 0.0419 (or price/earnings below 23.87) is in the better half of the sector 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.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

long in some constituents of SPLG

Comments

[SleepyInSeattle]

Today, SPLG:
NAV is $51.64
price is $53.99
Do not buy - above NAV

[SleepyInSeattle]

SPLG is trading at NAV - BUY.