KXI: Consumer Staples Dashboard For May

Summary

• The tobacco industry stays on top of the sector regarding valuation and quality scores.
• Food and staples retail is the most overvalued industry.
• KXI, a global alternative to XLP.
• 8 stocks cheaper than their peers in May.
• Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

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This monthly article series shows a dashboard with aggregate industry metrics in consumer staples. It is also a review of sector ETFs like the Consumer Staples Select Sector SPDR ETF (XLP) and the iShares Global Consumer Staples ETF, 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 & 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 food in the table below is the 11-year average of the median Earnings Yield in food 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
Staple/Food Retail	-31.56	10.36	0.0289	1.7396	0.0165	21.01	20.79	0.0439	1.9406	0.0331	16.35	22.54	-6.98%	0.40%
Food	-22.47	-4.05	0.0408	0.4877	0.0183	14.92	31.79	0.0462	0.6889	0.0249	15.30	33.68	-4.47%	4.46%
Beverage	-18.69	-13.95	0.0320	0.2786	0.0101	23.46	41.03	0.0373	0.2691	0.0185	24.63	53.39	2.08%	8.64%
Household prod.	-1.25	2.10	0.0610	1.1559	0.0100	18.35	39.41	0.0440	0.8704	0.0403	17.03	40.85	0.97%	-27.42%
Personal care	-17.19	17.56	0.0373	0.3806	0.0145	25.93	63.08	0.0388	0.4608	0.0208	21.55	54.95	-8.16%	-17.67%
Tobacco	38.72	100*	0.0611	0.7235	0.0221	263.89	51.47	0.0592	0.4567	0.0143	26.78	52.79	-1.35%	12.27%

*Capped to 100 for convenience

Value And Quality Chart

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

Value and quality in consumer staples (Chart: author; data: Portfolio123)

Evolution Since Last Month

Valuation has improved in food, tobacco, and retail, and deteriorated in beverage. Quality has significantly deteriorated in household products.

Value and quality variation (Chart: author; data: Portfolio123)

Momentum

The next chart plots momentum data.

Momentum in consumer staples (Chart: author; data: Portfolio123)

Interpretation

The tobacco industry has been the top one of the sector for months regarding value and quality scores. It is also number one in 12-year momentum. A note of caution about sample size: there are only five tobacco companies in my reference universe. Household products are very close to their historical baseline in both value and quality. Personal care is moderately overvalued (by about 17%), but it may be justified by a good quality score. Other sectors are overvalued by 18% to 31% and quality metrics don't justify it.

Fast Facts On KXI

The iShares Global Consumer Staples ETF (NYSEARCA:KXI) has been following the S&P Global 1200 Consumer Staples Capped Index since 09/12/2006. It has a distribution yield of 2.34% and a total expense ratio of 0.43%, which is more expensive than U.S. index ETFs in the same sector like XLP (0.12%). About 56% of asset value is invested in U.S. companies and 33% in Europe. Large cap stocks represent 91% of the portfolio.

As of writing, the fund has 112 holdings. The next table shows the top 10 names with fundamental ratios and dividend yields. Their aggregate weight is 49.4%.

Ticker	Name	Weight%	EPS growth %TTM	P/E TTM	P/E fwd	Yield%	Exchange
PG	Procter & Gamble Co	9.31	5.25	27.03	26.46	2.36	NYSE
OTCPK:NSRGY*	Nestle SA	8.73	44.12	18.67	25.00	2.46	Switz.
KO	Coca-Cola Co	4.88	42.07	27.74	26.63	2.68	NYSE
PEP	PepsiCo Inc	4.85	35.58	23.85	26.18	2.64	NASDAQ
PM	Philip Morris International Inc	4.46	4.39	18.40	19.05	4.70	NYSE
WMT	Walmart Inc	4.12	2.94	26.94	19.47	1.71	NYSE
COST	Costco Wholesale Corp	4.07	26.84	39.55	37.29	0.73	NASDAQ
UL*	Unilever PLC	3.25	N/A	N/A	17.15	4.24	London
DEO*	Diageo PLC	3.02	180.90	26.87	26.33	2.06	London
BTI*	British American Tobacco PLC	2.7	13.82	10.69	9.42	6.72	London

Ratios: Portfolio123

* for stocks primarily listed outside the US, I refer to the US tickers, whereas the fund holds shares in primary exchanges.

Since inception in September 2006, KXI has underperformed the US consumer staples sector benchmark XLP by 1.9 percentage point, and shows a higher risk measured in maximum drawdown.

	Total Return	Annual Return	Max Drawdown
KXI	245.29%	8.23%	-40.98%
XLP	353.95%	10.14%	-33.45%

In summary, KXI is a good instrument for investors seeking an international exposure to consumer defensive companies. With a yield above 2%, it may also be part of a dividend-oriented portfolio. About 56% of holdings is quoted in USD, the rest is in various currencies (mostly GBP, CHF, EUR, JPY). Non-USD positions are not currency-hedged, which may be a bad point or a good one depending on a shareholder's base currency and objectives. The portfolio is quite heavy in the top two holdings: PG and Nestle weigh 18% of asset value together. These are time-tested companies, but investors who are concerned about that may prefer the Invesco S&P 500® Equal Weight Consumer Staples ETF (RHS).

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 food company with an earnings yield above 0.0408 (or price/earnings below 24.51) 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.

USNA	USANA Health Sciences Inc
SAFM	Sanderson Farms Inc
TSN	Tyson Foods Inc.
COKE	Coca-Cola Consolidated Inc
TAP	Molson Coors Beverage Company
WBA	Walgreens Boots Alliance Inc
EPC	Edgewell Personal Care Co
VGR	Vector Group Ltd

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.

Disclosure: I/we have a beneficial long position in the shares of KO, PM 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.