S&P 500 Valuation Dashboard – Update

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S&P 500 Valuation Dashboard – Update

This monthly series gives fundamental scores by sector for companies in the S&P 500 index (VOO, SPY, IVV). I follow chosen fundamental factors for every sector and compare them to a historical baseline so as to create a synthetic dashboard with a value score (V-score) and a quality score (Q-score). You can find here data that may be useful in a top-down approach.

Methodology

  • The median value of four valuation ratios is calculated for S&P 500 companies in each sector: Price/Earnings (P/E), Forward Price Earnings for the current year (Fwd P/E), Price to Sales (P/S), and Price to Free Cash Flow (P/FCF).
  • It is compared in percentage to its own historical average. For example, a difference of 10% means that the current median ratio is 10% over- or under-priced relative to its historical average in the sector.
  • The V-score of a sector is the average of differences in percentage for the four factors multiplied by -1. The higher the better.
  • The Q-score is the difference between the current median ROE (return on equity) and its historical average. The higher the better.
  • GICS sectors had major changes in 2016 (real estate) and in 2018 (communication). Historical averages have been calculated using the current sub-industry structure in the past when possible so as to compare things that are comparable.

The choice of the valuation and quality ratios has been justified in previous articles. Among the simple, publicly available fundamental factors, they are the best predictors of future returns according to 17-year backtests. Median values are better reference data than averages for stock-picking. Each median is the middle point of a sector, which can be used to separate good and bad elements. A median is also less sensitive to outliers.

Sector valuation metrics on 10/3/2019

The next table reports the four valuation factors. There are three columns for each factor: the current median value, the historical average (“Avg”) between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference in percentage (“%Hist”). The first column “V-score” shows the value score as defined above.

V-score

P/E

Avg

%Hist

Fwd P/E

Avg

%Hist

P/S

Avg

%Hist

P/FCF

Avg

%Hist

All

-24.80

21.04

19.18

9.67

15.95

14.83

7.55

2.52

1.58

59.78

30.19

24.7

22.22

Cs. Discretionary

-11.99

17.54

18.15

-3.37

15.03

14.11

6.53

1.34

1.01

33.03

27.25

24.38

11.76

Cs. Staples

-32.29

23.61

20.48

15.30

19.98

16.27

22.78

2.63

1.54

70.90

47.21

39.28

20.19

Energy

7.00

13.05

17.8

-26.71

13.80

14.38

-4.01

1.55

1.94

-20.00

37.54

30.59

22.73

Financials

-2.83

11.93

15.02

-20.57

10.78

11.55

-6.66

2.31

1.89

22.34

11.66

10.03

16.22

Healthcare

-10.55

25.91

23.76

9.04

16.18

16.85

-3.98

3.94

2.93

34.62

30.80

30.04

2.54

Industrials

-23.86

19.32

18.75

3.03

15.18

14.52

4.56

1.87

1.24

50.60

35.22

25.66

37.24

Technology

-14.44

26.24

28.14

-6.76

19.03

19.29

-1.33

4.26

2.84

49.90

29.12

25.11

15.96

Communication

14.64

16.14

21.28

-24.14

17.26

17.09

0.99

1.86

2.01

-7.46

18.96

26.31

-27.94

Materials

-16.94

18.25

19.74

-7.53

14.79

14.36

3.01

1.80

1.15

56.90

31.76

27.53

15.36

Utilities

-69.53

24.68

15.21

62.27

20.33

13.15

54.58

2.90

1.11

161.28

N/A

43.5

N/A

Real Estate

-24.93

40.06

40.71

-1.61

51.28

36

42.45

9.35

6.67

40.19

61.48

51.8

18.69

Energy: P/FCF Avg starts in 2000 – Utilities: P/FCF too volatile to be relevant – Real Estate: Avg start in 2006

V-score chart:



Sector quality metrics

The next table gives a score for each sector relative to its own historical average. Here, only one factor is accounted.

Q-score (Diff)

Median ROE

Avg

All

1.54

16.47

14.93

Cs. Discretionary

4.74

22.62

17.88

Cs. Staples

-2.53

21.53

24.06

Energy

-6.02

8.87

14.89

Financials

-0.57

11.96

12.53

Healthcare

-0.94

16.66

17.6

Industrials

8.64

25.59

16.95

Technology

14.21

27.96

13.75

Communication

5.57

17.54

11.97

Materials

0.97

14.86

13.89

Utilities

-0.95

10.40

11.35

Real Estate

0.52

7.35

6.83

Q-score chart:



Momentum

The next table and chart show the return in one month and one year for all sectors, represented by their respective SPDR ETFs (including dividends).

sector

ETF

1-month return

1-year return

All

SPY

-0.46%

0.70%

Cs. Discretionary

XLY

-0.97%

2.01%

Cs. Staples

XLP

-1.12%

14.56%

Energy

XLE

-0.48%

-23.90%

Financials

XLF

1.30%

-0.93%

Healthcare

XLV

-1.95%

-6.48%

Industrials

XLI

0.00%

-3.96%

Technology

XLK

-0.05%

4.90%

Communication

XLC

-1.32%

-0.10%

Materials

XLB

-0.27%

-2.52%

Utilities

XLU

0.84%

25.35%

Real Estate

XLRE

-1.89%

23.66%

Monthly Momentum:



Annual Momentum:



Interpretation

For median-based metrics, S&P 500 companies look overpriced by about 25%, with a ROE above the historical average by 1.5 point.

Since last month:

  • The S&P 500 went down 0.5%.
  • The V-score has improved by 0.9 percentage points.
  • The Q-score is stable.
  • Looking only at the median P/E, S&P 500 companies are overpriced by 10% relative to the average from 2000 to 2015.
  • Financials and utilities are in gain, industrial and technology are flat, and other sectors show monthly losses.
  • Utilities and real estate are the best-performing sectors last 12 months with gains over 20%. Energy is the worst one with a loss of 24%.
  • V-Score has improved in consumer discretionary, healthcare, technology, and communication, and deteriorated elsewhere.
  • Q-score has deteriorated in consumer staples and is stable elsewhere.

According to these metrics, communication and energy are underpriced by about 15% and 7% respectively. The financial sector is fairly priced. Healthcare, technology, materials and consumer discretionary are overpriced by 10% to 20%; industrials, real estate and consumer staples by 24% to 32%; utilities by about 70%. Communication, technology, industrials, and consumer discretionary are far above their historical averages in quality metric. Energy is the only sector significantly below it. Combining these valuation and quality metrics, communication is the most attractive sector, and utilities the worst one.

Disclosure: I am/we are long SPY. 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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