CEG - FUTY: Utilities Dashboard For January

2024-01-18 07:00:32 ET

Summary

• The utilities sector is close to 11-year averages regarding valuation and quality metrics.
• FUTY: an alternative to XLU for long-term investors.
• Here are 10 utilities stocks cheaper than their peers in January 2024.

This monthly article series shows a dashboard with aggregate industry metrics in utilities. It is also a top-down analysis of sector ETFs like Utilities Select Sector SPDR ETF ( XLU ) and Fidelity MSCI Utilities Index ETF ( FUTY ), 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 hardware in the table below is the 11-year average of the median Earnings Yield in hardware companies.

The Value Score ("VS") is defined as the average difference in % between two valuation ratios (EY, SY) and their baselines (EYh, SYh) . FY is reported for consistency with other sector dashboards, but it is ignored in utilities ' s core to avoid some inconsistencies. 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 two valuation ratios are of equal importance.

Current data

The next table shows the metrics and scores as of the last trading day'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

The value score has improved in water utilities.

Momentum

The next chart plots momentum scores based on median returns.

Interpretation

According to my monthly S&P 500 dashboard , the utilities sector is close to 11-year averages regarding valuation and quality metrics. Gas utilities are slightly undervalued, water utilities are slightly overvalued. Electricity and multi-utilities are at their historical baseline.

Fast facts on FUTY

Fidelity MSCI Utilities Index ETF started investing operations on 10/21/2013 and tracks the MSCI USA IMI Utilities 25/50 Index. The expense ratio is a bit lower than for the SPDR ETF XLU (0.08% vs. 0.10%).

As of writing, the portfolio has 70 holdings and is quite concentrated. The top 10 holdings, listed in the next table with fundamental ratios, represent 52% of asset value. The top 3 names weigh between 7% and 12%.

Ratios: Portfolio123

FUTY is shortly behind XLU regarding total return since inception. Nevertheless, the difference in annualized return, maximum drawdown, volatility and risk-adjusted performance (Sharpe ratio) is insignificant, as reported below.

Valuation ratios are also very similar:

FUTY provides a capital-weighted exposure to utilities for a cheap fee. It has more holdings than XLU (currently 70 vs. 32), but past performance and valuation metrics are almost on par. The two funds are equivalents for long-term investors. XLU has much higher trading volumes, which makes it a better instrument for short-term trading. Both funds have a high exposure to the top holding NextEra Energy. Investors looking for a more diversified portfolio may prefer Invesco S&P 500 Equal Weight Utilities ETF ( RSPU ).

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 gas utilities company with an Earnings Yield above 0.0599 (or price/earnings below 16.69) 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 list below was sent to subscribers several weeks ago based on data available at this time.

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

For further details see: