XLY: Consumer Discretionary Dashboard For August

Summary

  • The durables and apparel subsector is undervalued by about 20% relative to 11-year averages.
  • Auto and components are the less attractive subsector regarding valuation and quality metrics.
  • XLY fast facts.
  • 10 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 »

Tesla inc cars flagship store in Chengdu China with Tesla logo and an electric car model X inside

Julien Viry/iStock Editorial via Getty Images

This monthly article series shows a dashboard with aggregate subsector metrics in Consumer Discretionary. It is also a top-down analysis of sector exchange-traded funds ("ETFs") like the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY), the Fidelity MSCI Consumer Discretionary Index ETF (FDIS) and the Vanguard Consumer Discretionary ETF (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

-49.89

-11.72

0.0467

0.9045

0.0067

13.36

23.72

0.0605

1.6364

0.0375

19.36

22.05

9.65%

-8.18%

Durables + Apparel

21.49

11.47

0.0765

0.7044

0.0366

26.82

35.63

0.0509

0.6984

0.0323

18.19

47.21

3.26%

-16.31%

Retailing

-25.13

15.98

0.0499

0.6244

0.0216

33.51

34.66

0.0498

0.8886

0.0399

24.52

36.36

8.18%

-5.20%

Services

-22.40

-5.03

0.0177

0.3959

0.0181

14.13

32.62

0.0340

0.4134

0.0213

14.33

35.70

6.95%

-2.74%

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

The value score has deteriorated in durables/apparel. Quality keeps improving in services.

Variations in value and quality

Variations 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 undervalued by about 21% relative to 11-year averages, and they also are above the quality baseline. Other subsectors are overvalued by 22% to 50% regarding the same metrics. The most overpriced one is auto and components. Overvaluation in retail may be partly justified by a good quality score. The services subsector, which includes hotels, restaurants, leisure and diversified services, has improved a lot in the last 12 months, but value and quality scores still are below the baseline.

Fast Facts on XLY

The Consumer Discretionary Select Sector SPDR Fund (XLY) has been tracking the Consumer Discretionary Select Sector Index since 12/16/1998. It has 59 holdings and a total expense ratio of 0.10%, which is the same as VCR and a bit more expensive than FDIS (0.08%).

The next table shows the top 10 holdings with basic ratios and dividend yields. Their aggregate weight is 73%, with 44% in the top two names. Amazon.com Inc (AMZN) and Tesla (TSLA) respectively represent 24.49% and 19.45% of the fund's asset value.

Ticker

Name

Weight%

EPS growth %TTM

P/E TTM

P/E fwd

Yield%

AMZN

Amazon.com Inc

24.49

-61.05

127.35

1008.03

0

TSLA

Tesla Inc

19.45

332.59

109.44

73.92

0

HD

Home Depot Inc.

8.57

14.50

19.98

19.64

2.34

MCD

McDonald's Corp

3.95

-11.61

32.85

27.04

2.07

NKE

Nike Inc

3.86

5.39

30.91

30.95

1.05

LOW

Lowe's Cos Inc

3.75

30.80

17.06

16.03

1.94

SBUX

Starbucks Corp

2.66

48.92

24.90

30.76

2.21

BKNG

Booking Holdings Inc

2.28

272.91

57.18

22.41

0

TGT

Target Corp

2.10

-29.89

19.66

21.17

2.50

TJX

TJX Companies Inc

2.09

35.97

24.26

21.91

1.74

Ratios by Portfolio123

XLY has beaten the S&P 500 (SPY) by 2.2 percentage points in annualized return since January 1999. Drawdown and standard deviation of monthly returns (volatility) point to a higher risk (see next table).

Total Return

Annual. Return

Drawdown

Sharpe

Volatility

XLY

759.61%

9.53%

-59.05%

0.46

19.49%

SPY

430.60%

7.32%

-55.42%

0.41

15.33%

Data calculated with Portfolio123

In summary, XLY is a good fund with cheap management fees for investors seeking capital-weighted exposure in consumer cyclicals. Fidelity's fund is even cheaper, but the difference is not very significant. XLY is more liquid: it is a better instrument for trading and tactical allocation. Investors who are concerned by the high concentration in Amazon and Tesla may prefer 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 0.0509 (or price/earnings below 19.65) 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.

PLCE

Children's Place Inc

AN

AutoNation Inc

JWN

Nordstrom Inc.

M

Macy's Inc

WSM

Williams-Sonoma Inc

PLAY

Dave & Buster's Entertainment Inc

GDEN

Golden Entertainment Inc

SBH

Sally Beauty Holdings Inc

MUSA

Murphy USA Inc

PATK

Patrick Industries 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
14.51K 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 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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