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Summary 4 key factors are reported across industries in the Financial sector. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This article is part of a series giving a valuation dashboard by sector of companies in the S&P 500 index (NYSEARCA: SPY ). I follow up a certain number of fundamental factors for every sector, and compare them to historical averages. This article goes down to the industry level in the GICS classification. It covers Financials. The choice of the fundamental ratios 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. A link to a list of individual stocks to consider is provided at the end. 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 for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name (for example D-P/E for price/earnings). The industry factors are 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. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. Industry valuation table on 11/4/2015 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 as explained above. So there are 3 columns 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 Commercial Banks 15.42 15.24 -1.18% 2.97 2.06 -44.17% 19.79 13.44 -47.25% 8.78 8.89 -0.11 Thrifts & Mortgage Finance* 18.66 20.66 9.68% 2.97 2.03 -46.31% 21.55 14.75 -46.10% 6.25 5.02 1.23 Diversified Financial Services 21.45 17.85 -20.17% 4.36 2.94 -48.30% 19.78 16.13 -22.63% 8.04 6.38 1.66 Consumer Finance* 11.58 13.15 11.94% 1.64 1.47 -11.56% 6.68 8.22 18.73% 13.36 11.83 1.53 Capital Markets* 16.39 18.07 9.30% 3.58 3.06 -16.99% 19.55 19.62 0.36% 8.96 7.89 1.07 Insurance 14.24 13.7 -3.94% 1.29 1.07 -20.56% 10.77 8.99 -19.80% 9.31 8.71 0.6 REITs** 35.85 35.42 -1.21% 5.36 4.56 -17.54% 49.26 38.74 -27.16% 5.24 4.07 1.17 Real Estate Management** 30.22 31.19 3.11% 3.79 3.06 -23.86% 24.68 25.55 3.41% 4.27 -1.33 5.6 * Averages since 2003 – ** Averages since 2006 Valuation The following charts give an idea of the current status of 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 (NYSEARCA: XLF ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion XLF and SPY have distinct ways but very similar returns in the last 6 months. From the valuation charts above, we can note that some industries look overpriced, but all of them are above or close to their historical averages in quality. Two industries in the sector look more attractive than others: Consumer Finance and Real Estate Management & Development. For both of them, 2 valuation factors out of 3 and the quality factor are better than their respective averages. Commercial Banks, Diversified Financial Services, Insurance and REITs are overpriced for the 3 valuation ratios. Commercial Banks look the weakest industry of this study, with all metrics in negative territory. However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Financials beating their industry factors is provided on this page . If you want to stay informed of my updates, click the “Follow” tab at the top of this article. You can choose the “real-time” option if you want to be instantly notified. Scalper1 News
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