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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. Scalper1 News
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