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Valuation Dashboard: Energy And Materials

Summary Four key fundamental factors are reported across industries in Energy and Basic Materials. They give a valuation status of an industry relative to its historical average. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow up a certain number of fundamental factors for every sector, to compare them to historical averages. This article covers Energy and Basic Materials. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Four industry factors calculated by Portfolio123 are extracted from the database: price/earnings (P/E), price to sales (P/S), price to free cash flow (P/FCF), return on equity (ROE). They are compared with their own historical averages, “Avg.” The difference is named with a prefix “D” before the factor’s name (for example D-P/E for the price/earnings ratio). It is measured in percentage for valuation ratios and in absolute for ROE. The methodology is quite different from the S&P 500 dashboard. In some industries, S&P 500 companies are very few, so mid- and small caps are included here. Also, the fundamental industry factors are not median values, but proprietary data from the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large-cap universe. The drawback is that these factors are not representative of capital-weighted indices. They may be very useful as reference values for picking stocks in an industry, but are less relevant for ETF investors. Industry valuation table on 10/26/2015 The next table reports the four industry factors. For each factor, the next “Avg.” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference between the historical average and the current value, in percentage. So there are three columns relative to P/E, and also three for each ratio. P/E Avg. D- P/E P/S Avg. D- P/S P/FCF Avg. D- P/FCF ROE Avg D-ROE Energy Equipment & Services 21.25 24.2 12.19% 0.81 1.73 53.18% 7.86 35.34 77.76% -10.59 7.34 -17.93 Oil/Gas/Fuel 17.27 18.53 6.80% 1.95 3.35 41.79% 14.22 29.03 51.02% -13.51 4.47 -17.98 Chemicals 20.04 18.48 -8.44% 1.44 1.21 -19.01% 35.4 25.37 -39.53% 9.17 6.74 2.43 Construction Materials 53.65 21.44 -150.23% 1.34 1.16 -15.52% 52 40.5 -28.40% 10.61 5.77 4.84 Packaging 21.91 17.96 -21.99% 0.92 0.61 -50.82% 21.92 20.09 -9.11% 18.58 8.34 10.24 Metals & Mining 20.74 19.83 -4.59% 1.27 2.65 52.08% 15.18 25.53 40.54% -19.81 -8.6 -11.21 Paper & Wood 31.74 21.27 -49.22% 0.77 0.72 -6.94% 21.78 22.81 4.52% 8.41 4.99 3.42 The following charts give an idea of the current valuation status of Energy and Materials industries relative to their historical average. In all cases, the higher the better. Price/Earnings Price/Sales Price/Free Cash Flow Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF in Materials (NYSEARCA: XLB ) and energy (NYSEARCA: XLE ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion Since last month, XLB has outperformed SPY by 1%, and XLE has lagged by 3%. Both have been widely underperforming the broad index in the last six months. At the industry level, Energy Equipment & Services, Oil/Fuel/Gas and Metals/Mining look undervalued relative to their historical averages, but they are in negative territory for quality. Oil/Fuel/Gas and Metals/Mining have improved since last month in valuation due to the sharp decline in oil, metal and stock prices. Oil/Fuel/Gas deteriorated in quality, but Metals/Mining is stable. Chemicals, Construction Materials and Packaging are above their historical average in quality, but overpriced for the three valuation factors. Valuation factors have deteriorated for Construction Materials since last month because of a few outliers and the relatively small number of companies in this industry. No industry in these two sectors looks globally very attractive. However, comparing individual fundamental factors to the industry factors provided in the table may help find quality stocks at a reasonable price. A list of stocks in energy and basic materials beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article.

After Value, Dividend And Quality, Momentum Has Also Started To Lag

Summary Large groups of Value, Dividend and Quality stocks have been lagging the market for one year. Momentum was a good place to hide until September. The last weeks have been harmful for Dividend and Quality stocks. A previous article published on 9/1 pointed out that groups of stocks broadly selected on value, dividend and quality criteria have been lagging the benchmark since the 3rd quarter of 2014. To spare you the time of reading it, this was the conclusion: In the recent months, a wide outperformance of momentum stocks has been detrimental to value, dividend and quality stocks. The recent correction was beneficial to dividend stocks excess return, but value and quality are still lagging. This fashion in momentum explains why a lot of investors with portfolios based on value and quality factors have underperformed the market in the recent months. The trend started in June 2014, and accelerated in June and July 2015. This phenomenon is not limited to a small group, it is widely spread in the 100 best stocks of the S&P 500 index (NYSEARCA: SPY ) in each investing style category. These categories are simplified by taking the top 20% of the S&P 500 ranked on a unique factor. The top 20% of value stocks is defined as the 100 S&P 500 stocks with the lowest price/earnings ratio (P/E trailing 12 months, excluding extraordinary items). The top 20% of dividend stocks is defined as the 100 S&P 500 stocks with the highest yield. The top 20% of quality stocks is defined as the 100 S&P 500 stocks with the highest return on equity (ROE trailing 12 months). The top 20% of momentum stocks is defined as the 100 S&P 500 stocks with the highest price increase in 1 year (250 trading days). Variations in the relative performance of such large groups of stocks may be random on short periods. When they are consistent on long periods, they denote a behavioral change in the market. My aim here is to observe and quantify this change, not to explain it. Hereafter you can see the equity curves and statistics of the four “top 20%” groups for the last 3 months. The lists are updated and equal-weighted on market opening of the first trading day every week. Dividends are reinvested. Top 20% Value: (click to enlarge) Top 20% Dividend: (click to enlarge) Top 20% Quality: (click to enlarge) Top 20% Momentum (click to enlarge) The next table gives the annualized excess return over SPY of the top 20% group for each category since 1/1/1999, then on the last 12 months, 6 months, 3 months and 1 month. Annualized excess return of the top 20% stocks in… Since 1999 Last 12 months Last 6 months Last 3 months Last month Value 6.89% -7.67% -12.58% -10.4% -12.99% Dividend 5.37% -4.22% -5.93% -2.6% -34.16% Quality 4.91% -2.53% -7.49% -9.69% -30.14% Momentum 3.63% 4.45% 6.45% -2.2% -16.64% The long term outperformance of all groups confirms that investors following any of these investing styles can get a positive statistical bias. This has been documented in countless academic publications. Value investing has an edge over other styles. However, value stocks have been lagging for more than 1 year (since June 2014 exactly). The sector meltdown in energy and some basic materials companies is an incomplete explanation: it is accountable for less than half of the negative excess return of value stocks on this period. The relative loss has accelerated a bit in the last month. Dividend and quality stocks have also been lagging for at least one year, and their underperformance has accelerated considerably in the last month. Momentum stocks have been outperforming their own historical excess return for at least 1 year, but they did worse than SPY in the last 3 months, and especially in the last month. Conclusion Until September, we could interpret the situation as a transfer of excess return from value, quality and dividend to momentum. Lately, momentum has also underperformed and the benchmark index has done better than the 4 groups of stocks representing classic investing styles. After looking at data before the 2 major downturns since 1999, my previous article concluded that such patterns don’t seem to be clues to identify a market top. There are cycles of variables amplitudes and time frames in asset classes, sectors and investing styles. On the long term, value, dividend, quality and momentum offer a statistical bias. On the short term, investors following quantitative or discretionary strategies based on these styles may experience more frustration before getting back their edge. Updates I plan to publish updates on investing styles performance. If you don’t want to miss the next one, click “follow” at the top of this article. Data and charts: portfolio123

Valuation Dashboard By Industries: Energy And Materials, October 2015

Summary 4 key fundamental factors are reported across industries in Energy and Basic Materials. They can be used to assess the valuation status of an industry relative to its historical average. They can also be used as a reference for picking quality stocks at a reasonable value. I started in September 2015 a monthly series of articles giving a valuation dashboard by sector of companies in the S&P 500 index (NYSEARCA: SPY ). The idea is to follow up a certain number of fundamental factors for every sector, to compare them to historical averages. This article is the first one of another series going down at industry level in the GICS classification. It covers Energy and Basic Materials. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no due diligence, analysis, recommendations, or lists of individual stocks to consider. To make a complete picture by sticking a “bottom-up” under the “top-down”, you have to navigate in articles written by industry experts. Here is the link to articles tagged by sector. Methodology Four industry factors calculated by portfolio123 are extracted from the database: Price/Earnings “P/E”, Price to sales “P/S”, Price to free cash flow “P/FCF”, Return on Equity “ROE”. They are compared with their own historical averages “Avg”. The difference is measured in percentage and named with a prefix “D-” before the factor’s name (for example “D-P/E” for the price/earnings ratio). The methodology is quite different from the S&P 500 dashboard. In some industries, S&P 500 companies are very few, so mid- and small caps are included here. Also, the fundamental industry factors are not median values, but proprietary data by the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large cap universe. The drawback is that these factors are not representative of capital-weighted indices. They may be very useful as a reference values for picking stocks in an industry, but are less relevant for ETF investors. Industry valuation table on 10/26/2015 The next table reports the 4 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference between the historical average and the current value, in percentage. So there are 3 columns relative to P/E, and also 3 for each ratio.   P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE Energy Equip. & Services 17.2 24.2 28.93% 0.81 1.73 53.18% 10.58 35.34 70.06% -6.2 7.34 -184.47% Oil/Gas/Fuel 19.65 18.53 -6.04% 2.06 3.35 38.51% 20.11 29.03 30.73% -6.59 4.47 -247.43% Chemicals 19.61 18.48 -6.11% 1.46 1.21 -20.66% 34.93 25.37 -37.68% 8.68 6.74 28.78% Constr. Materials 34.81 21.44 -62.36% 1.33 1.16 -14.66% 65.74 40.5 -62.32% 12.38 5.77 114.56% Packaging 20.11 17.96 -11.97% 0.91 0.61 -49.18% 21.67 20.09 -7.86% 18.77 8.34 125.06% Metals&Mining 21.49 19.83 -8.37% 1.55 2.65 41.51% 16.77 25.53 34.31% -19.32 -8.6 -124.65% Paper&Wood 26.08 21.27 -22.61% 0.75 0.72 -4.17% 20.16 22.81 11.62% 9.09 4.99 82.16% Valuation The following charts give an idea of the current status of Energy and Materials industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF in Materials (NYSEARCA: XLB ) and Energy (NYSEARCA: XLE ) with SPY. (click to enlarge) Conclusion Both sectors are in a downtrend, in absolute and relative to the broad market. At the industry level, Energy Equipment & Services, Oil/Fuel/Gas and Metals/Mining look undervalued relative to their own historical averages for several factors, but they are in negative territory for quality. At the opposite, Chemicals, Construction Materials and Packaging are above their historical average in quality, but overpriced for the 3 valuation factors. No industry in these two sectors looks very attractive. However, comparing individual fundamental factors to the industry factors provided in the table may help find quality stocks at a reasonable price. A list of stocks in energy and basic materials beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article. You can choose the “real-time” option if you want to be instantly notified.