IVV: S&P 500 Dashboard For December

Summary

• Median overvaluation of S&P 500 stocks is about 25% relative to 11-year averages.
• Energy and materials look attractive regarding valuation and quality metrics.
• Technology and industrials are the most overvalued, but they score well in quality.
• 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

This monthly dashboard series reports sector metrics in the S&P 500 index. It is also a top-down analysis of all ETFs tracking this index. Among them, the iShares Core S&P 500 ETF (NYSEARCA:IVV) is the second most popular behind the SPDR S&P 500 ETF (SPY) regarding assets under management and average daily volume. It is also cheaper in management fee, with a 0.03% expense ratio vs. 0.09% for SPY.

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	-24.78	13.54	0.0367	0.2921	0.0266	17.63	48.60	0.0464	0.4722	0.0314	14.63	45.61	-2.81%	23.98%
Cs. Discretionary	-26.74	9.70	0.0388	0.4308	0.0255	25.67	34.67	0.0477	0.6937	0.0334	20.57	36.65	-0.10%	30.34%
Cs. Staples	-11.82	6.54	0.0383	0.4813	0.0213	27.88	38.63	0.0459	0.5191	0.0241	23.34	41.27	-0.66%	4.95%
Energy	31.89	25.73	0.0293	0.5096	0.0353	6.45	48.98	0.0173	0.5397	-0.0185	4.79	42.00	-5.93%	62.87%
Financials	-16.81	25.87	0.0800	0.3300	0.0461	14.57	79.38	0.0672	0.4784	0.0749	10.28	72.21	-5.72%	40.55%
Healthcare	-22.97	8.59	0.0330	0.2243	0.0299	18.66	63.74	0.0392	0.3193	0.0390	16.25	62.29	-5.17%	17.51%
Industrials	-37.97	13.17	0.0300	0.3009	0.0229	24.87	37.48	0.0482	0.6108	0.0307	19.94	36.87	-2.37%	21.44%
Technology	-38.50	19.32	0.0273	0.1563	0.0265	27.28	64.14	0.0418	0.3019	0.0393	20.10	62.31	1.41%	37.95%
Communication	-25.24	-2.09	0.0315	0.4176	0.0340	15.71	55.32	0.0498	0.5361	0.0409	16.54	54.85	-8.44%	-2.19%
Materials	-0.59	14.92	0.0462	0.4384	0.0328	20.38	37.47	0.0448	0.6403	0.0259	16.32	35.70	-2.64%	9.68%
Utilities	-26.39	8.51	0.0447	0.3731	-0.0697	10.10	43.71	0.0532	0.5903	-0.0433	9.72	38.62	-1.91%	6.22%
Real Estate	-10.55	27.26	0.0209	0.0908	0.0059	8.78	66.48	0.0197	0.1183	0.0069	5.74	65.42	-0.44%	42.21%

Click to enlarge

Score Charts

The next chart plots the value and quality scores by sectors (higher is better).

Chart: Author; data: Portfolio123

Score variation since last month:

Chart: Author; data: Portfolio123

The next chart plots momentum data.

Chart: Author; data: Portfolio123

Interpretation

A hypothetical S&P 500 “median” company is overvalued by about 24.8% relative to average valuation metrics since 2010. The quality score is 13.5 points above the baseline. We can translate median yields in their inverse ratios:

Price/Earnings: 27.25 - Price/Sales: 3.42 - Price/Free Cash Flow: 37.39

They have improved since last month.

From a fundamental point of view, energy is the most attractive sector and the only one with both value and quality scores above the baseline. Its metrics have improved a lot since last month and it also has the strongest 12-month momentum. Materials looks good too: it is close to 11-year averages in valuation and above the quality baseline. Consumer staples, financials and real estate are moderately overvalued (by 10% to 17%), which may be partly justified by good quality scores. Other sectors are overvalued by 20% to 40%. Technology and industrials look the most overpriced, but technology has an excellent quality score. In fact, all sectors except communication are above their quality baseline.

The S&P 500 has gained 25.8% in 12 months, the momentum measured in median return is 24% and the equal-weight average is 25% (measured on RSP). It was almost the same as the S&P mid-cap 400 index (+24.8% for MDY). It means 2021 stock performance was quite homogeneous across size segments in the large- and mid-cap universe. Small caps are lagging a bit (+20.5% for IWM).

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 0.0383 (or price/earnings below 26.11) 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.

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.