VDC: Consumer Staples Dashboard For August

Summary

  • The tobacco industry is undervalued relative to historical averages.
  • Beverage and staple retail are the less attractive subsectors regarding value scores.
  • VDC vs. XLP.
  • 7 stocks cheaper than their peers in August.
  • Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

Unrecognizable woman marvels at grocery bread selection

SDI Productions

This monthly article series shows a dashboard with aggregate industry metrics in consumer staples. It may also serve as a top-down analysis of sector ETFs like the Consumer Staples Select Sector SPDR ETF (XLP) and the Vanguard Consumer Staples ETF (NYSEARCA:VDC), 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

-34.54

12.71

0.0332

1.7268

0.0098

22.13

20.53

0.0434

1.9302

0.0322

16.53

22.43

5.95%

15.31%

Food

-6.74

10.72

0.0541

0.5601

0.0197

20.95

28.34

0.0461

0.6801

0.0246

15.31

33.51

6.67%

8.09%

Beverage

-22.43

-23.58

0.0321

0.2364

0.0104

18.72

40.75

0.0370

0.2681

0.0180

24.57

53.17

8.38%

18.40%

Household prod.

-3.44

0.91

0.0665

1.1002

0.0056

18.25

38.89

0.0444

0.8759

0.0392

17.11

40.87

4.82%

-15.44%

Personal care

-13.27

8.61

0.0368

0.3791

0.0166

22.11

63.17

0.0385

0.4577

0.0203

21.53

55.16

7.87%

-1.12%

Tobacco

31.93

100*

0.0622

0.6338

0.0222

207.17

50.86

0.0589

0.4623

0.0145

31.65

52.69

1.53%

4.84%

*capped 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 moves are an improvement in quality score for the food industry and a deterioration in value score for tobacco.

Score variations

Score variations (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 best-ranked in both value and quality scores (a note of caution: there are only five tobacco companies in this universe, so statistics are less reliable than in other subsectors). Food, household products and personal care products are close to their valuation and quality baselines based on 11-year averages. Beverage and food/staple retail look overvalued by about 22% and 35%, respectively. Beverage in the only subsector below its quality baseline.

VDC fast facts

The Vanguard Consumer Staples ETF (VDC) has been following the MSCI USA IMI Consumer Staples 25/50 Index since 01/26/2004. It has a distribution yield of 2.21% and a total expense ratio of 0.10%, the same as XLP.

As of writing, the fund has 100 holdings. The next table shows the top 10 with their growth, price/earnings ratios and dividend yields. Their aggregate weight is 62.6%. The fund is quite sensitive to risks related the top five names: each of them weighs between 7% and 12.5% of equity value.

Ticker

Name

Weight%

EPS ttm growth%

P/E ttm

P/E fwd

Yield%

PG

Procter & Gamble Co.

12.44%

5.61

25.81

25.24

2.44

KO

Coca-Cola Co.

9.62%

17.92

29.65

26.46

2.70

PEP

PepsiCo Inc.

8.72%

12.39

27.15

27.03

2.55

COST

Costco Wholesale Corp.

8.47%

19.36

44.18

42.79

0.64

WMT

Walmart Inc.

7.08%

41.30

27.74

23.86

1.61

PM

Philip Morris International Inc.

4.13%

2.58

17.26

17.86

4.98

MDLZ

Mondelez International Inc.

3.64%

-8.61

23.78

22.53

2.35

MO

Altria Group Inc.

3.26%

-60.24

46.89

9.43

7.89

CL

Colgate-Palmolive Co.

2.60%

-27.76

35.94

27.33

2.27

EL

Estee Lauder Cos Inc.

2.59%

143.95

30.78

36.65

0.85

Ratios: Portfolio123

VDC has slightly outperformed XLP since inception, but the difference in annualized total return is insignificant (27 bps). These two ETFs also have similar risks measured in drawdown and volatility.

Total Return

Annual Return

Max Drawdown

Sharpe

StdDev

VDC

493.98%

10.07%

-35.92%

0.79

11.29%

XLP

467.03%

9.80%

-33.45%

0.78

11.07%

In summary, VDC 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 100 vs. 35), but this has not made a significant difference in past performance: smaller holdings have a low aggregate weight relative to S&P 500 companies. For long-term investors, XLP and VDC 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 7.08% to 12.44% individually and 46.3% 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 0.0541 (or price/earnings below 18.48 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.

HAIN

Hain Celestial Group Inc.

POST

Post Holdings Inc.

TSN

Tyson Foods Inc.

TAP

Molson Coors Beverage Company

USNA

USANA Health Sciences 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.

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
14.53K 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. 

Step up your investing experience: try Quantitative Risk & Value for free now (limited offer).

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 a beneficial long position in the shares of 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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