FSTA: Consumer Staples Dashboard For June

Summary

  • Tobacco is the most undervalued industry in the sector, followed by household products.
  • Food/Staple retail is the less attractive one.
  • FSTA, an alternative to XLP.
  • 7 stocks cheaper than their peers in June.
  • Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

Shopping basket full of variety of grocery products, food and drink on yellow background.

Bet_Noire/iStock via Getty Images

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 Fidelity MSCI Consumer Staples Index ETF (NYSEARCA:FSTA), 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 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

-30.12

9.87

0.0328

1.8869

0.0122

21.01

20.63

0.0437

1.9377

0.0328

16.40

22.51

-6.59%

1.31%

Food

-3.11

-3.62

0.0546

0.5979

0.0211

16.22

29.18

0.0461

0.6860

0.0248

15.30

33.63

-7.25%

-3.73%

Beverage

-12.96

-13.88

0.0332

0.3035

0.0108

23.46

41.03

0.0372

0.2689

0.0183

24.62

53.32

-4.54%

-5.82%

Household prod.

10.26

2.01

0.0640

1.3634

0.0117

18.35

39.41

0.0441

0.8717

0.0400

17.06

40.86

-9.71%

-28.83%

Personal care

-12.46

17.56

0.0391

0.4259

0.0142

25.93

63.20

0.0387

0.4596

0.0206

21.57

55.02

-5.42%

-12.29%

Tobacco

35.89

100*

0.0573

0.6834

0.0231

263.29

51.30

0.0591

0.4581

0.0143

28.36

52.76

-7.62%

3.76%

*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

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

Evolution since last month

The most notable improvements are in value scores for the food industry and household products.

Value and quality variation

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

Momentum

The next chart plots momentum data.

Momentum in consumer staples

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

Interpretation

The tobacco industry is the most attractive one relative to 11-year averages in value and quality metrics. A note of caution about statistics and sample size: there are only five tobacco companies in my reference universe. Household products are undervalued by about 10% regarding the same metrics and quality is close to the historical baseline. The food industry is close to the baseline in both value and quality. Personal care is moderately overvalued, but a good quality score may justify it. Staple/food retail is the less attractive industry in the sector: it is overvalued by 30%. Quality is good, but not high enough to justify such overvaluation.

Fast facts on FSTA

The Fidelity MSCI Consumer Staples Index ETF has been following the MSCI USA IMI Consumer Staples 25/50 Index since 10/21/2013. It has a total expense ratio of 0.08%, which is a bit cheaper than XLP (0.12%). There is no material difference in performance between FSTA and XLP since inception (see next table). Risk measured in drawdown and volatility is also similar.

Total Return

Annual Return

Max Drawdown

FSTA

104.66%

8.65%

-23.02%

XLP

106.62%

8.77%

-22.27%

As of writing, the fund has 105 holdings. The next table shows the top 10 names with fundamental ratios and dividend yields. Their aggregate weight is 61%.

Ticker

Name

Weight

EPS growth %TTM

P/E TTM

P/E fwd

Yield%

PG

Procter & Gamble Co

13.07%

5.25

23.16

22.68

2.76

KO

Coca-Cola Co

9.09%

42.07

25.16

24.16

2.95

PEP

PepsiCo Inc

8.01%

35.58

21.57

23.74

2.92

COST

Costco Wholesale Corp

7.10%

19.36

36.13

35.14

0.78

WMT

Walmart Inc

6.78%

8.20

25.65

18.60

1.88

PM

Philip Morris International Inc

4.33%

4.39

17.00

17.84

5.09

MO

Altria Group Inc

4.03%

-29.52

27.81

9.40

7.88

MDLZ

Mondelez International Inc

3.67%

13.19

19.81

20.09

2.37

CL

Colgate-Palmolive Co

2.62%

-22.19

30.72

24.34

2.54

EL

Estee Lauder Cos Inc

2.39%

143.95

26.57

33.95

0.99

Ratios: Portfolio123

In summary, FSTA is a good instrument with cheap fees for investors seeking a capital-weighted exposure in consumer staples. It holds much more stocks than XLP (currently 105 vs. 33), but past performance since inception is almost identical. For long-term investors, XLP and FSTA are equivalents, but liquidity makes XLP a better choice for tactical allocation and trading. The fund is significantly exposed to risks related to the top five holdings, which weigh 6.8% to 13% individually and 44% in aggregate. Investors who are concerned by this concentration 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 0.0546 (or price/earnings below 18.32) 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

EPC

Edgewell Personal Care Co

BJ

BJ's Wholesale Club Holdings Inc

POST

Post Holdings Inc

TSN

Tyson Foods Inc.

TAP

Molson Coors Beverage Company

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
14.34K 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 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.

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