USNA - IYK: Consumer Staples Dashboard For November

2023-11-18 08:00:00 ET

Summary

• The consumer staples sector is very close to 11-year averages in valuation.
• The tobacco industry has the best value score, but quality metrics are underwhelming.
• iShares US Consumer Staples ETF has been outperforming XLP since inception.
• 7 consumer staples stocks cheaper than their peers in November 2023.

This monthly article series shows a dashboard with aggregate industry metrics in consumer staples. It may also serve as a top-down analysis of sector exchange-traded funds, or ETFs, like Consumer Staples Select Sector SPDR® Fund ETF ( XLP ) and iShares US Consumer Staples ETF ( IYK ), 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

The most notable change is an improvement in value score for the tobacco industry.

Momentum

The next chart plots momentum scores based on median returns.

Interpretation

The consumer staples sector valuation was very close to 11-year averages when I published my S&P 500 dashboard for November . The tobacco industry looks very attractive regarding valuation, but it shows the worst quality score in the sector. There are only five tobacco companies in this universe, so statistics may be less reliable than in other industries. Household products and staple/food retail are undervalued by respectively 29% and 15% relative to their historical baseline. Quality looks bad for the former, though. Food, beverage and personal care are close to their baseline regarding both valuation and quality.

IYK fast facts

iShares US Consumer Staples ETF started investing operations on 6/12/2000. It has a 12-month distribution yield of 2.80% and a total expense ratio of 0.40%, which is significantly higher than for XLP (0.10%). Distributions are paid quarterly.

IYK tracks the Russell 1000 Consumer Staples RIC 22.5/45 Capped Index. As described in the prospectus by iShares , it is a float adjusted capitalization-weighted index of consumer defensive stocks in the Russell 1000 index. Constituent weights are capped to a maximum of 22.5%, and the aggregate weight of issuers exceeding 4.5% is capped to a maximum of 45%.

As of writing, IYK holds 55 U.S. stocks, mostly large and mega cap companies (about 68% of asset value). The next table shows the top 10 holdings, representing an aggregate weight of 65.7%. The fund is quite exposed to risks related to the top 3 names, which weigh between 10% and 17% individually, and over 38% in aggregate.

Ratios: Portfolio123.

IYK has outperformed XLP by 2.3% in annualized return since 1/1/2001. It shows a higher risk measured in drawdown and volatility, but it still beats its peer in risk-adjusted return (Sharpe ratio).

IYK has also beaten XLP by 13% in total return in the last 3 years:

In summary, iShares US Consumer Staples ETF shows a better past performance than XLP on 22-year and 3-year periods, despite higher fees. It may be a good choice for long-term investors. However, XLP has much higher trading volumes, making it a better instrument for short-term trading. Both funds are quite concentrated in the top holdings. Investors seeking a more balanced portfolio may prefer Invesco S&P 500 Equal Weight Consumer Staples ETF ( RSPS ).

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 0.0509 (or price/earnings below 19.65 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: