VPU: Utilities Dashboard For December

Summary

  • The less overvalued subsector is gas utilities.
  • Quality metrics are OK, but not good enough to justify current valuations.
  • VPU: an alternative to XLU.
  • 10 stocks cheaper than their peers in December.
  • Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

Torres de transmisión de electricidad con cables rojos brillantes

peterschreiber.media/iStock via Getty Images

This monthly article series shows a dashboard with aggregate industry metrics in utilities. It is also a top-down analysis of sector ETFs like the Utilities Select Sector SPDR ETF (XLU) and the Vanguard Utilities ETF (NYSEARCA:VPU), 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 industry: 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 hardware in the table below is the 11-year average of the median Earnings Yield in hardware companies.

The Value Score ("VS") is defined as the average difference in % between two valuation ratios (EY, SY) and their baselines (EYh, SYh). FY is reported for consistency with other sector dashboards, but it is ignored in utilities’ score to avoid some inconsistencies. 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 two valuation ratios 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

Gas

-12.23

3.15

0.0539

0.4560

-0.1154

9.62

38.64

0.0492

0.6911

-0.0526

9.49

36.84

3.90%

11.21%

Water

-40.01

7.40

0.0271

0.1388

-0.0428

10.64

56.05

0.0388

0.2769

-0.0327

9.37

55.35

-0.47%

10.68%

Electricity

-29.66

7.44

0.0424

0.3614

-0.0662

10.10

42.99

0.0543

0.5773

-0.0417

9.89

38.12

4.31%

11.70%

Value and Quality Chart

The next chart plots the Value and Quality Scores by industry. Higher is better.

VPU value and quality score

Chart: Author; data: Portfolio123

Evolution Since Last Month

Value scores have recently deteriorated in gas and electricity.

VPU value and quality score evolution since last month

Chart: Author; data: Portfolio123

Momentum

The next chart plots momentum data.

VPU momentum scores

Chart: Author; data: Portfolio123

Interpretation

Gas utilities industries are slightly overvalued by about 12% relative to 11-year averages. Electricity and water look even less attractive: overvaluation reaches about 30% and 40%, respectively. Quality is above the baseline in the three subsectors, but not good enough to justify value scores. Utilities are the third weakest sector regarding 12-month momentum after communication services and consumer staples. Annual momentum of subsectors is quite homogeneous around 11%.

Focus on VPU

The Vanguard Utilities ETF (VPU) has been tracking the MSCI USA IMI Utilities 25/50 Index since 01/26/2004. The expense ratio of 0.10% is a bit more expensive than FUTY (0.08%), which tracks the same index, and a bit cheaper than XLU (0.12%), which tracks a large-cap utilities index. VPU is also available as a mutual fund (VUIAX).

As of writing, it has 67 holdings. The next table shows the top 15 with basic ratios and dividend yields. Their aggregate weight is 67%.

Ticker

Name

Weight

EPS growth % ttm

P/E ttm

P/E fwd

Yield%

NEE

NextEra Energy, Inc.

15.34%

-39.52

76.78

36.42

1.67

DUK

Duke Energy Corp.

7.19%

42.23

26.70

19.82

3.80

SO

Southern Co.

6.05%

-6.09

23.82

19.72

3.96

D

Dominion Energy, Inc.

5.61%

2408.96

24.67

20.18

3.22

EXC

Exelon Corp.

4.76%

-29.81

31.99

19.57

2.80

AEP

American Electric Power Co., Inc.

3.88%

23.49

18.30

18.58

3.58

SRE

Sempra Energy

3.55%

-71.30

34.79

15.50

3.45

XEL

Xcel Energy Inc.

3.19%

4.23

23.57

23.14

2.66

PEG

Public Service Enterprise Group Inc.

2.95%

-135.23

N/A

18.07

3.11

AWK

American Water Works Co., Inc.

2.90%

15.00

43.43

42.90

1.32

ES

Eversource Energy

2.67%

-2.24

26.39

23.73

2.65

WEC

WEC Energy Group, Inc.

2.60%

9.26

23.33

23.81

3.00

ED

Consolidated Edison, Inc.

2.37%

-17.25

25.27

19.97

3.67

EIX

Edison International

2.19%

104.43

33.50

15.00

4.16

PPL

PPL Corp.

2.03%

-81.62

79.09

24.69

5.67

The performance and risk metrics of VPU and XLU since February 2004 are almost identical (see table below).

Annual. Return

Drawdown

Sharpe

VPU

10.14%

-46.31%

0.68

XLU

10.13%

-46.48%

0.66

Data calculated with Portfolio123

In summary, VPU is a fund with cheap fees for investors seeking a capital-weighted exposure in utilities. It holds more stocks than XLU (currently 67 vs. 29), but there is no difference in past performance: tail holdings have a low aggregate weight relative to S&P 500 companies in this sector. Buy-and-hold investors may prefer VPU for its slightly lower management fees while XLU is a better instrument for tactical allocation and swing trading thanks to a much higher liquidity. Exposure to the top holdings is high, especially to NextEra Energy (over 15% of asset value). Investors who don’t like concentrated funds may prefer the Invesco S&P 500 Equal Weight Utilities ETF (RYU).

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 an electricity company with an Earnings Yield above 0.0424 (or price/earnings below 23.58) is in the better half of the industry 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.

CNP

CenterPoint Energy, Inc.

CWT

California Water Service Group

ETR

Entergy Corp.

FE

FirstEnergy Corp.

HE

Hawaiian Electric Industries, Inc.

NRG

NRG Energy, Inc.

NWN

Northwest Natural Holding Co.

OGE

OGE Energy Corp.

PNW

Pinnacle West Capital Corp.

SR

Spire Inc.

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.

QRV Dashboard List finds undervalued stocks by checking various metrics in companies with comparable business models. 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 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.

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