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Summary 5 key fundamental factors are calculated across sectors. They are compared to historical averages. It results in a value score and a quality score for each sector. This article is part of a monthly series giving a valuation by sector of companies in the S&P 500 index (NYSEARCA: SPY ). I follow some fundamental factors for every sector and compare them to historical averages, so as to create a synthetic dashboard with a Value Score (V-score) and a Quality Score (Q-score). The choice of the valuation ratios has been justified here . The Q-score uses the Return on Equity (see why here ). In this series you can find numbers that may be useful in a top-down approach. There is no individual stock analysis or recommendations. You can refine your research reading articles by industry experts here . Methodology The median value of 4 valuation ratios is calculated for S&P 500 companies in each sector: Price/Earnings (P/E), Forward Price Earning for the current year (Fwd P/E), Price to sales (P/S), Price to free cash flow (P/FCF). It is compared to its own historical average Avg. The difference is measured in percentage (%Hist). For example, %Hist= 10 means that the current median ratio is 10% overpriced relative to its historical average in the sector. The V-score of a sector is the average of %Hist for the 4 factors, multiplied by -1, so that the higher is the better. The Q-score is the difference between the current median ROE (return on equity) and its historical average. Why and how using median values Median values are simpler than capital-weighted averages or aggregate ratios on each sector considered a mega company. They are also better reference data than averages for stock-picking. Each number in the table below is the middle point of a sector data set, which can be used to separate the good elements and the bad ones for the sector and the factor. Median values are also less sensitive to outliers than averages. A note of caution: for ETF investors, the most relevant valuation ratio would be the result of an aggregate calculation, neither a median value nor a capital-weighted average of individual stock factors. Example The next chart shows an example: the median P/E for all S&P 500 companies (updated on the week of publication). (click to enlarge) The latest value is compared to the average of the reference period to calculate %Hist. Sector valuation table on 12/14/2015 The next table reports the median valuation ratios. For example, the P/E column gives the current median value of P/E in each sector. The next “Avg” column gives its average between January 1999 and August 2015, which is my arbitrary reference of fair valuation. The next “%Hist” 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. 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 -18.48 21.15 19.18 10.27 16.6 14.83 11.94 2.16 1.58 36.71 28.41 24.7 15.02 Cons.Disc. -19.48 20.07 18.7 7.33 15.99 14.56 9.82 1.61 1.12 43.75 27.52 23.52 17.01 Cons.Stap. -31.01 25.6 20.48 25.00 19.57 16.27 20.28 2.33 1.54 51.30 50.06 39.28 27.44 Energy -7.36 20.31 17.8 14.10 25.89 14.38 80.04 1.48 1.94 -23.71 18.05 30.59 -40.99 Financials -36.60 18.19 16.16 12.56 14.77 12.38 19.31 2.81 2.03 38.42 21.59 12.26 76.10 Healthcare -6.04 27.92 23.76 17.51 16.3 16.85 -3.26 3.38 2.93 15.36 28.41 30.04 -5.43 Industrials -10.82 18.66 18.75 -0.48 16.15 14.52 11.23 1.47 1.24 18.55 29.25 25.66 13.99 I.T. & Tel. 2.22 24.79 27.16 -8.73 16.47 19.29 -14.62 3.17 2.72 16.54 25.48 26.02 -2.08 Materials -19.35 22.41 19.74 13.53 16.92 14.36 17.83 1.37 1.15 19.13 34.94 27.53 26.92 Utilities -27.66 17.63 15.21 15.91 15.81 13.15 20.23 1.63 1.11 46.85 Energy: P/FCF Avg starts in 2000 – Utilities: P/FCF not taken into account because of frequent outliers in this sector. V-score chart Sector quality table 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 -0.50 14.43 14.93 Cons.Disc. 3.99 21.33 17.34 Cons.Stap. -2.86 21.2 24.06 Energy -14.14 0.75 14.89 Financials -2.38 9.93 12.31 Healthcare -4.71 12.89 17.6 Industrials 2.90 19.85 16.95 I.T. & Tel. 1.88 14.99 13.11 Materials 4.85 18.74 13.89 Utilities -2.25 9.1 11.35 Q-score chart Interpretation The S&P 500 looks overpriced by about 18.5% relative to the historical reference period. Since last issue’s statistics (11/10): SPY is down by more than 2.5%. Overpricing has increased by about 1%. Quality is stable globally and for every sector. 4 sectors have improved in valuation: Energy, Consumer Discretionary, Consumer Staples and Industrials. The only attractive sector regarding these metrics is Technology (including Telecom). It looks underpriced and has a median ROE above the historical average. The least overpriced sector among the rest is Healthcare. The most overpriced sector is Financials. For Materials, Industrials and Consumer Discretionary, a quality factor better than the historical average can justify at least a part of the overpricing. 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. Data: portfolio123 Scalper1 News
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