XLU: Utilities Dashboard For July

Summary

  • This is one of the 2 most pricey sectors because it outperformed in the market downturn.
  • Subsectors are overvalued by 15% to 25%.
  • XLU fast facts.
  • 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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Bigpra

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 (NYSEARCA:XLU), 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. In 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

-15.75

-1.35

0.0461

0.4728

-0.0891

8.84

38.36

0.0482

0.6489

-0.0578

9.44

36.99

2.63%

12.93%

Water

-24.90

6.07

0.0341

0.1596

-0.0389

10.75

55.21

0.0381

0.2629

-0.0323

9.56

55.40

10.32%

-6.40%

Electricity

-25.30

-0.08

0.0447

0.3524

-0.0591

8.96

41.88

0.0526

0.5470

-0.0435

9.85

38.45

3.22%

4.24%

Value And Quality chart

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

Value and Quality in Utilities

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

Evolution Since Last Month

The value score went a bit up in gas and electricity, a bit down in water. These moves are not very significant.

1-month variations in Utilities sector

1-month variations (Chart: author; data: Portfolio123)

Momentum

The next chart plots momentum data.

Momentum in Utilities

Momentum in Utilities (Chart: author; data: Portfolio123)

Interpretation

Utilities is one of the two most overvalued sectors, along with industrials (S&P 500 dashboard here). The sector has the second-best 1-year momentum behind energy. Utilities industries are overvalued by 15% to 25% relative to 11-year averages. Quality is above the historical baseline in water utilities, but not high enough to justify a 25% overvaluation. Electricity and gas are close to the quality baseline. Regarding momentum, water is the weakest subsector in a trailing year and the strongest one in a trailing month.

XLU Fast Facts

The Utilities Select Sector SPDR Fund (XLU) has been tracking the Utilities Select Sector Index since 12/16/1998. It has 28 holdings, an expense ratio of 0.12% and a distribution yield of 2.9%.

The next table shows the top 10 holdings with basic ratios and dividend yields. Their aggregate weight is 63% and the largest one weighs 15.7% (NextEra Energy Inc.). The risk related to the top four holdings is quite elevated (each of these positions represents over 6.5% of the portfolio).

Ticker

Name

Weight%

EPSgrowth %ttm

P/E ttm

P/E fwd

Yield%

NEE

NextEra Energy Inc.

15.67

-65.14

105.24

27.12

2.19

DUK

Duke Energy Corp.

8.38

173.19

22.12

19.33

3.81

SO

Southern Company

7.79

-32.29

33.36

20.17

3.79

D

Dominion Energy Inc.

6.51

241.75

21.84

18.94

3.42

AEP

American Electric Power Co.

4.96

13.77

17.92

18.70

3.34

SRE

Sempra

4.82

-75.95

47.24

17.55

3.07

EXC

Exelon Corp.

4.39

136.41

16.54

19.36

3.09

XEL

Xcel Energy Inc.

3.86

2.96

22.96

21.60

2.84

ED

Consolidated Edison Inc.

3.35

27.65

21.20

20.33

3.45

WEC

WEC Energy Group Inc.

3.22

7.88

23.04

22.62

2.95

Ratios by Portfolio123.

Investors who don’t like the exposure to the top names may prefer the Invesco S&P 500 Equal Weight Utilities ETF (RYU).

Since January 1999, XLU has beaten the S&P 500 (SPY) in total return (411% vs. 374%). However, the difference in annualized return is just about 40 bps (7.2% vs 6.8%). XLU has outperformed the broad index by 16.5 percentage points in the last 12 months:

XLU vs. SPY

XLU vs. SPY last 12 months (Chart by Portfolio123)

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 0.0447 (or price/earnings below 22.37 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.

NRG

NRG Energy Inc

SR

Spire Inc

BKH

Black Hills Corp

HE

Hawaiian Electric Industries Inc.

FE

FirstEnergy Corp.

CWT

California Water Service Group

EXC

Exelon Corp

PNW

Pinnacle West Capital Corp

CNP

CenterPoint Energy Inc.

PNM

PNM Resources 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.

In these uncertain times, Quantitative Risk & Value (QRV) provides you with risk indicators and data-driven, time-tested strategies. 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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