WMT - FSTA: Consumer Staples Dashboard For January

Summary

• Household products are the safest industry regarding valuation and quality scores.
• Staple/food retail and personal care are overvalued by over 25% relative to their historical baseline.
• FSTA, an alternative to XLP.
• 2 stocks cheaper than their peers in January.

This monthly article series shows a dashboard with aggregate industry metrics in consumer staples. It is also a review of sector ETFs like the Consumer Staples Select Sector SPDR ETF ( XLP ) and the Fidelity MSCI Consumer Staples Index ETF ( FSTA ), whose largest holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each industry: Earnings Yield ("EY"), Sales Yield ("SY"), Free Cash Flow Yield ("FY"), Return on Equity ("ROE"), Gross Margin ("GM"). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable or non-available when the "something" is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for food in the table below is the 11-year average of the median Earnings Yield in food companies.

The Value Score ("VS") is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score ("QS") is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance.

Current data

The next table shows the metrics and scores as of last week's closing. Columns stand for all the data named and defined above.

Value And Quality chart

The next chart plots the Value and Quality Scores by industry (higher is better).

Evolution since last month

Valuations have improved in beverage, and deteriorated in other industries. Quality fell sharply in staple/food retail.

Momentum

The next chart plots momentum data.

Interpretation

Household products are close to their historical baseline in value and quality. The tobacco industry is undervalued relative to 11-year averages, but quality looks bad. A note of caution though: there are only five tobacco companies in my reference universe, so statistics are less reliable than in other subsectors. Personal care is the most overvalued industry, but staple/food retail is the less attractive one: both value and quality scores are far below the baseline.

Fast facts on FSTA

The Fidelity MSCI Consumer Staples Index ETF has been following the MSCI USA IMI Consumer Staples 25/50 Index since 10/21/2013. It has a total expense ratio of 0.08%, which is a bit cheaper than XLP (0.10%). There is no material difference in annualized return between the two funds since inception (see next table). Maximum drawdown and volatility are also similar.

As of writing, the fund has 109 holdings. The next table shows the top 10 names with fundamental ratios and dividend yields. Their aggregate weight is 61.3%.

Ratios: Portfolio123

In summary, FSTA is a good instrument with cheap fees for investors seeking a capital-weighted exposure in consumer staples. It holds much more stocks than XLP (currently 109 vs. 35), but past performance since inception is almost identical. For long-term investors, XLP and FSTA are equivalents. Higher liquidity makes XLP a better choice for tactical allocation and trading. The fund has a significant exposure to risks related to the top five holdings, which weigh 6.9% to 12.9% individually, and 44.6% in aggregate. Investors who are concerned by this concentration may prefer the Invesco S&P 500 Equal Weight Consumer Staples ETF ( RHS ).

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a food company with an earnings yield above 0.0478 (or price/earnings below 20.92) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The stocks below are in the list sent to subscribers a few weeks ago based on data available at this time.

It is a rotational list with a statistical bias toward excess returns on the long-term, not the result of an analysis of each stock.

For further details see: