Tag Archives: xlu

Valuation Dashboard: Utilities- Update

Summary 3 key factors are reported across industries in Utilities. 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 on a certain number of fundamental factors for every sector, to compare them to historical averages. This article covers Utilities. 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 Three industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), 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. 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. The price-to-cash-flow ratio used in my dashboards for other sectors has been eliminated here, because discontinuities and outliers make it often irrelevant in Utilities. Industry valuation table on 11/4/2015 The next table reports the 3 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 ROE Avg D-ROE Electric Utilities 18.06 15.94 -13.30% 1.74 1.22 -42.62% 9.24 10.43 -1.19 Gas Utilities 21.3 17.24 -23.55% 1.4 0.97 -44.33% 10.5 11.49 -0.99 Multi-Utilities 19.44 16.59 -17.18% 1.64 0.95 -72.63% 9.59 9.48 0.11 Water Utilities 22.66 23.68 4.31% 5.06 3.94 -28.43% 3.01 7.96 -4.95 Ind.Power Prod. & Energy Traders* 44.08 34.9 -26.30% 2.59 4.16 37.74% -3.42 -5.15 1.73 * Averages since 2005 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: Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF ( XLU ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion XLU has underperformed SPY by about 4% in the last 3 months. On this period, the 5 best performing S&P 500 Utilities stocks are NiSource Inc. (NYSE: NI ), Pepco Holdings Inc. (NYSE: POM ), PPL Corp (NYSE: PPL ), SCANA Corp (NYSE: SCG ), TECO Energy Inc.(NYSE: TE ). NI hit an all-time high in November. Valuation factors have slightly improved since last month for Electric and Gas Utilities, but these industries stay in the weakest positions with all metrics in negative territory. Independent Power Producers and Energy Traders are above their baseline in quality, but valuation factors are mixed. 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 Utilities 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.

Valuation Dashboard: Utilities – November 2015

Summary 3 key factors are reported across industries in Utilities. 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 is going down at industry level in the GICS classification, and includes also mid and small cap companies. It covers Utilities. 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 Three industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), 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. The price-to-cash-flow ratio used in my dashboards for other sectors has been eliminated here, because discontinuities and outliers make it often irrelevant in Utilities. Industry valuation table on 11/4/2015 The next table reports the 3 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 ROE Avg D-ROE Electric Utilities 18.13 15.94 -13.74% 1.77 1.22 -45.08% 8.94 10.43 -1.49 Gas Utilities 21.8 17.24 -26.45% 1.46 0.97 -50.52% 10.34 11.49 -1.15 Multi-Utilities 19 16.59 -14.53% 1.67 0.95 -75.79% 10.22 9.48 0.74 Water Utilities 22.89 23.68 3.34% 4.7 3.94 -19.29% 3.5 7.96 -4.46 Ind.Power Prod. & Energy Traders* 34.92 34.9 -0.06% 3.33 4.16 19.95% -4.22 -5.15 0.93 * Averages since 2005 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: Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF (NYSEARCA: XLU ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion Utilities have played their traditional defensive role during the correction in August, but XLU has slightly underperformed the broad market last 6 months. Looking at the valuation and quality charts above, only one industry looks attractive: Independent Power Producers and Energy Traders. Its industry P/E factor points to a fair pricing, and the 2 other factors are better than their historical averages. At the opposite, Electric and Gas Utilities look the less attractive, the 3 factors being worse than averages. 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 Utilities 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.

Utilities Are Not The Safe Haven You Think They Are

On a peak to trough basis, utilities have underperformed the S&P 500 and Dow Jones Industrial Average in 2015. XLU fell 56.87% and 49.66% during each of the last two bear markets. It’s not worth the extra yield to buy something with as much risk to principal as utilities stocks. In my recent article, ” The Fed Might Do Something It Hasn’t Done In 28 Years ,” I dispelled a myth concerning the labor force participation rate that’s been floating around the financial world. Today, I turn my attention to dispelling another myth: that utilities stocks are a safe-haven investment. For some strange reason, utilities have gained a reputation for being a safe-haven during turbulent times. Perhaps that was true in the distant past. But in today’s world, it couldn’t be further from the truth. As volatility picked up in recent weeks, it wouldn’t surprise me if many investors in the Seeking Alpha community dumped some money in utilities, under the assumption that a nearly 4% yield and reliable cash flows will protect you from a potential bear market. For those investors and anyone else considering parking money in Wall Street’s notorious safe haven, the chart below might make you cringe. (click to enlarge) As you can see on the monthly chart, during each of the past two bear markets, the Utilities Select Sector SPDR Fund (NYSEARCA: XLU ), an ETF that serves as a proxy for the utilities sector, was absolutely destroyed. During the 2000 to 2002 bear market, XLU declined 56.87%. That decline was worse than the S&P 500’s (NYSEARCA: SPY ) 50.51% drop and worse than the Dow Jones Industrial Average’s (NYSEARCA: DIA ) 38.75% fall. Although XLU managed to outperform the S&P 500 and the Dow during the 2007 to 2009 bear market, it still fell 49.66% peak to trough. I can’t imagine any investor thinking a 50% drop would qualify something as a safe haven, even if that security pays a couple of percentage points more in dividends than do funds tracking the major market averages. What’s happened so far in 2015? Once again, XLU is underperforming the Dow and the S&P 500. The peak to trough declines for XLU are 17.66%, while the Dow pulled back 16.24% and the S&P 500 fell 12.54%. Unlike a bond, which matures at par, there is no contractual obligation ensuring XLU will ever return to the level at which you bought it. I realize that in today’s low interest rate environment, investors who are desperate for income may be tempted to buy utilities for the 3.79% SEC yield XLU currently sports. I’d rather make 0% in a deposit account or 3%+ in any number of individual corporate bonds, than assume the substantial risk to principal that utilities have shown in recent bear markets. Yes, I realize that during smaller bull market corrections, utilities have shown themselves to be outperformers. But who needs “safe havens” in bull markets? It’s the bear market safe havens that are valuable. And utilities, in this millennium, have been anything but a bear market safe haven. Just because everyone repeats something over and over, doesn’t mean that thing is necessarily true. An investment with substantial risk to your principal is not a safe haven, no matter how many pundits claim it is. Disclosure: I am/we are long SPY. (More…) 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.