RYU: Utilities Dashboard For September

Summary

  • Utilities subsectors are overvalued by 12% to 31% relative to 11-year averages.
  • Gas is the less overvalued one.
  • RYU: an ETF with limited risk exposure to individual companies.
  • 10 utility stocks cheaper than their peers in September.
  • Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

gas fire

sbayram/iStock via Getty Images

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 (XLU) and the Invesco S&P 500 Equal Weight Utilities ETF (NYSEARCA:NYSEARCA:RYU), 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. 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

-12.08

-2.64

0.0493

0.4683

-0.0859

8.88

37.17

0.0480

0.6403

-0.0587

9.42

37.00

-4.09%

22.48%

Water

-30.99

1.97

0.0291

0.1590

-0.0437

10.07

54.83

0.0379

0.2596

-0.0323

9.59

55.42

-3.62%

-0.30%

Electricity

-29.59

-0.31

0.0413

0.3338

-0.0622

9.06

41.34

0.0523

0.5397

-0.0441

9.84

38.54

-2.14%

10.60%

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

Value scores have significantly improved in gas and water.

Variations in value and quality

Variations in value and quality (Chart: author; data: Portfolio123)

Momentum

The next chart plots median returns by subsector.

Momentum in utilities

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

Interpretation

Gas utilities are overvalued by 12% relative to 11-year averages, whereas electricity and water are overvalued by about 30%. Quality is close to the historical baseline. All industries together, utilities are the second most overvalued sector after industrials, regarding my metrics.

Fast Facts on RYU

The Invesco S&P 500 Equal Weight Utilities ETF (RYU) has been tracking the S&P 500 Equal Weight Utilities Plus Index since 11/01/2006. It has a distribution yield of 2.17%. The expense ratio of 0.40% is significantly more expensive than XLU (0.10%).

As of writing, RYU holds 29 stocks, which were weighted equally on the last rebalancing. Now, the largest holding weights 4.54% of asset value. The next table shows the top 10 names with basic ratios and dividend yields. Their aggregate weight is about 37%. Holdings are the same as XLU, but weights are very different: the top holding of XLU weights about 16% and the top 10 together are overt 62%.

Ticker

Name

Weight%

EPS growth %TTM

P/E TTM

P/E fwd

Yield%

CEG

Constellation Energy Corp.

4.66

N/A

N/A

28.99

0.65

AES

The AES Corp.

4.22

-169.33

N/A

16.68

2.36

NEE

NextEra Energy, Inc.

3.78

-18.13

68.03

30.95

1.91

SRE

Sempra Energy

3.59

-48.50

48.02

19.81

2.68

SO

The Southern Co.

3.51

-3.87

27.61

21.72

3.48

CNP

CenterPoint Energy, Inc.

3.47

84.26

13.24

23.38

2.23

XEL

Xcel Energy, Inc.

3.45

2.63

24.95

23.66

2.60

WEC

WEC Energy Group, Inc.

3.41

5.90

24.00

23.67

2.80

AEE

Ameren Corp.

3.40

6.82

23.88

22.84

2.54

ED

Consolidated Edison, Inc.

3.39

38.47

21.66

21.92

3.20

Despite their difference in weighting, the performance and risk metrics of RYU and XLU since inception are extremely close (see table below).

Total Return

Annual. Return

Drawdown

Sharpe ratio

RYU

269.10%

8.59%

-47.52%

0.59

XLU

277.86%

8.75%

-46.60%

0.58

Data calculated with Portfolio123

In summary, RYU is a good product for investors looking for exposure to utilities without the concentration in top holdings of XLU and other capital weighted funds.

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 0.0413 (or price/earnings below 24.21) 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.

FE

FirstEnergy Corp.

POR

Portland General Electric Co.

BKH

Black Hills Corp.

EXC

Exelon Corp.

HE

Hawaiian Electric Industries, Inc.

PNW

Pinnacle West Capital Corp.

NJR

New Jersey Resources Corp.

CNP

CenterPoint Energy, Inc.

ETR

Entergy Corp.

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 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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