VCR: Consumer Discretionary Dashboard For May

Summary

  • Durables and apparel are cheap relative to 11-year averages.
  • Auto and components are the most overvalued subsector.
  • VCR: an alternative to XLY.
  • 10 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 »

Amazon fulfillment center building in Las Vegas

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This monthly article series shows a dashboard with aggregate subsector metrics in Consumer Discretionary. It is also a top-down analysis of sector ETFs like the Consumer Discretionary Select Sector SPDR ETF (XLY) and the Vanguard Consumer Discretionary ETF (NYSEARCA:VCR), 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 retailing in the table below is the 11-year average of the median Earnings Yield in retail 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. A floor of -100 is set for VS and QS when the calculation goes below this value. It may happen when metrics in a subsector 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 named and defined above.

VS

QS

EY

SY

FY

ROE

GM

EYh

SYh

FYh

ROEh

GMh

RetM

RetY

Auto + Components

-37.60

10.71

0.0612

0.9640

0.0103

18.63

27.50

0.0603

1.6408

0.0382

19.32

22.00

-12.08%

-26.82%

Durables + Apparel

68.03

26.89

0.0809

0.8018

0.0733

29.51

42.21

0.0503

0.6978

0.0321

17.91

47.41

-12.54%

-27.26%

Retailing

-5.35

14.34

0.0508

0.6691

0.0434

32.43

34.59

0.0499

0.8987

0.0403

24.25

36.44

-18.54%

-23.93%

Services

-21.97

-14.54

0.0182

0.2866

0.0245

11.39

33.26

0.0348

0.4161

0.0217

14.60

35.79

-18.32%

-21.94%

Value and Quality chart

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

Value and Quality in consumer discretionary

Value and Quality in consumer discretionary (Chart: author; data: Portfolio123)

Evolution since last month

Recently the value score has deteriorated in auto and components, and slightly improved in other subsectors. Quality has improved a lot in consumer services.

Evolution in Value and Quality

Evolution in Value and Quality (Chart: author; data: Portfolio123)

Momentum

The next chart plots momentum data.

Momentum in consumer discretionary

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

Interpretation

Durables and apparel are the only subsector to be undervalued relative to 11-year averages. It is also the best-ranked one in quality score. Retailing is slightly overvalued, but this may be justified by a good quality score. The services subsector, which includes hotels, restaurants, leisure and diversified services, has improved a lot since post-lockdown reopenings. It is still overvalued by about 22% and moderately below its quality baseline. The most overvalued subsector is auto and components (about 37%). Its quality score is good, but not high enough to justify such overvaluation.

Focus on VCR

The Vanguard Consumer Discretionary ETF (VCR) has been tracking the MSCI US IMI Consumer Discretionary 25/50 Index since 01/26/2004. It has 303 holdings and a total expense ratio of 0.10%, which is a bit lower than XLY (0.12%).

The next table shows the top 10 holdings with basic ratios and dividend yields. Their aggregate weight is 58.5%, with over 34% in the top two names. Amazon.com, Inc. (AMZN) and Tesla (TSLA) respectively represent 19.20% and 15.21% of the fund’s asset value.

Ticker

Name

Weight

EPS ttm growth%

P/E ttm

P/E fwd

Yield%

AMZN

Amazon.com, Inc.

19.20%

-21.09

51.66

117.93

0

TSLA

Tesla, Inc.

15.21%

637.63

96.31

58.26

0

HD

The Home Depot, Inc.

6.51%

29.95

18.38

17.35

2.67

MCD

McDonald's Corp

3.88%

37.63

24.41

23.48

2.39

NKE

NIKE, Inc.

3.31%

78.66

28.90

29.44

1.12

LOW

Lowe's Cos Inc

2.78%

54.67

15.35

13.72

1.74

TGT

Target Corp

2.30%

62.75

11.49

11.06

2.23

BKNG

Booking Holdings Inc

1.91%

-27.70

165.82

19.77

0

SBUX

Starbucks Corp

1.84%

347.38

19.08

24.64

2.75

TJX

TJX Companies Inc

1.56%

4323.57

22.27

19.02

1.96

Ratios by Portfolio123

VCR has beaten XLY by a short margin of 35 bps in annualized return since inception. Both ETFs have similar risk metrics (see next table).

Total Return

Annual. Return

Drawdown

Sharpe

Volatility

VCR

511.39%

10.40%

-61.45%

0.59

19.13%

XLY

476.84%

10.05%

-59.05%

0.6

18.20%

Data calculated with Portfolio123

In summary, VCR is a good product with cheap management fees for investors seeking capital-weighted exposure in consumer cyclicals. It currently holds 303 stocks including large, mid- and small caps, whereas XLY has only 61 holdings in large companies. However, it doesn’t make a significant difference in risk-adjusted performance between the two funds since 2004: tail holdings have a low aggregate weight relative to S&P 500 companies. VCR looks a good choice for long-term investors, but XLY liquidity makes it a better instrument for tactical allocation and trading. Investors must be aware that about one third of VCR asset value is in two stocks (AMZN and TSLA). If it is a concern, a better choice is the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD).

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 retail company with an Earnings Yield above 0.0508 (or price/earnings below 19.69) 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.

BLMN

Bloomin' Brands Inc

GDEN

Golden Entertainment Inc

PLAY

Dave & Buster's Entertainment Inc

PLCE

Children's Place Inc

AN

AutoNation Inc

WSM

Williams-Sonoma Inc

HIBB

Hibbett Inc

GPI

Group 1 Automotive Inc.

M

Macy's Inc

SBH

Sally Beauty Holdings 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.

From January 2017 to December 2021, the Dashboard List has returned about 81% (all sectors together) vs. 66% for its benchmark Russell 1000 Value Index (past performance is not a guarantee of future returns). QRV 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
14.28K Followers
Data-driven model portfolios and market 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.

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Disclosure: I/we have a beneficial long position in the shares of AMZN 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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