Summary
- Valuation metrics in utilities.
- Evolution since last month.
- A list of stocks looking cheap in their industries.
- This idea was discussed in more depth with members of my private investing community, Quantitative Risk & Value. Get started today »
This article series provides a monthly dashboard of industries classified by sectors. It compares valuation and quality factors relative to their historical averages in each industry.
Executive summary
Gas, water and electric utilities are significantly overpriced and close to their historical average in profitability (measured in return on equity). Power producers/traders have mixed metrics: price/sales and profitability are good, but price/earnings is rather bad.
Since last month:
- P/E has improved in water utilities and deteriorated elsewhere.
- P/S is stable in water utilities and power producers/traders, and deteriorated elsewhere.
- ROE has not changed significantly.
- The Utilities Select Sector SPDR ETF (XLU) has almost the same monthly return as the SPDR S&P 500 ETF.
- On this period, the best performing S&P 500 Utilities stocks are American Water Works Co. Inc. (AWK), Eversource Energy (ES), Evergy Inc. (EVRG), Pinnacle West Capital Corp. (PNW), and Southern Co. (SO).
Some cheap stocks in their industries
The stocks listed below are in the S&P 1500 index, cheaper than their respective industry factor for price/earnings and price/sales. The 10 companies with the highest return on equity are kept in the final selection. I update every month several lists like this in various sectors. Quantitative Risk & Value Members have an early access to these lists before they are published in free articles. The list was published for subscribers at the beginning of the month based on data available at this time. This is not investment advice. Do your own research before buying.
Detail of valuation and quality indicators in utilities on 1/17/2020
I take 3 aggregate industry factors: price/earnings (P/E), price to sales (P/S), return on equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.
For each factor, I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).
The next table reports the 3 industry factors. There are 3 columns for each factor: the current value, the average (“Avg”) between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above (“D-xxx”).
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