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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 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 Financials. 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 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 = (AvgP/E – P/E)/AvgP/E. It can be interpreted as a percentage in under-pricing relative to a historical baseline: the higher, the better. It points to over-pricing when negative. ROE is already a percentage. A relative variation makes little sense. That’s why we take the simple difference: D-ROE = ROE – AvgROE. The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. 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 12/3/2015 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 15.85 15.24 -4.00% 3.02 2.06 -46.60% 18.45 13.44 -37.28% 8.79 8.89 -0.1 Thrifts & Mortgage Finance* 19.29 20.66 6.63% 2.92 2.03 -43.84% 21.57 14.75 -46.24% 6.08 5.02 1.06 Diversified Financial Services 23.8 17.85 -33.33% 4.41 2.94 -50.00% 18.4 16.13 -14.07% 4.78 6.38 -1.6 Consumer Finance* 10.62 13.15 19.24% 1.4 1.47 4.76% 7.11 8.22 13.50% 11.13 11.83 -0.7 Capital Markets* 16.22 18.07 10.24% 3.57 3.06 -16.67% 17.55 19.62 10.55% 8.2 7.89 0.31 Insurance 14.46 13.7 -5.55% 1.3 1.07 -21.50% 11.67 8.99 -29.81% 9.05 8.71 0.34 REITs** 34.38 35.42 2.94% 5.19 4.56 -13.82% 45.45 38.74 -17.32% 4.97 4.07 0.9 Real Estate Management** 35.72 31.19 -14.52% 3.44 3.06 -12.42% 22.08 25.55 13.58% 4.01 -1.33 5.34 * 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 ( XLF ) with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) (chart from freestockcharts.com). (click to enlarge) Conclusion The financial ETF has the same return as SPY in the last 3 months. On this period, the 5 best performing S&P 500 financial stocks are Blackrock Inc (NYSE: BLK ), Cincinnati Financial Corp (NASDAQ: CINF ), Equinix (NASDAQ: EQIX ), Plum Creek Timber Co (NYSE: PCL ) and Public Storage (NYSE: PSA ). CINF, PCL and PSA hit an all-time high this week. Some financial industries look overpriced, but all of them are above or close to their baseline in quality, with ROE in a [-1.6,+5.4] interval from the historical average. REITs have improved since last month in valuation and are stable in quality. Consumer Finance is the only industry with 3 valuation factors pointing to underpricing. For Capital Markets, 2 out of 3 are pointing to underpricing. Commercial Banks, Diversified Financial Services and Insurance are overpriced for the 3 valuation ratios. Diversified Financial Services look the less attractive industry, 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 on this topic and other articles, click the “Follow” tab at the top of this article. Scalper1 News
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