KXI - KXI: Consumer Staples Dashboard For August

2023-08-20 05:54:27 ET

Summary

• The tobacco industry is undervalued, but its quality metrics are concerning.
• Food and personal care are overvalued by more than 20% relative to their historical baseline.
• KXI, a global alternative to XLP.
• 9 stocks cheaper than their peers in August.

This monthly article series shows a dashboard with aggregate industry metrics in consumer staples. It is also a review of sector ETFs like Consumer Staples Select Sector SPDR ETF ( XLP ) and iShares Global Consumer Staples ETF ( KXI ), 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

Valuation has greatly improved in tobacco, and to a lesser extent in staple/food retail.

Momentum

The next chart plots momentum scores based on median returns.

Interpretation

According to my S&P 500 monthly dashboard , the consumer staples is overvalued by 17.5% relative to 11-year averages. Nonetheless, tobacco looks greatly undervalued. A note of caution about sample size: there are only five tobacco companies in my reference universe, so statistics in this industry aren’t the most reliable. Food/staple retail is slightly undervalued and its quality score is close to the historical baseline. Household products and beverage are close to their baseline in value, but they suffer from a bad quality score. Food and personal care are overvalued by over 20% relative to their baseline.

Fast facts on KXI

iShares Global Consumer Staples ETF ( KXI ) started investing operations on 09/12/2006 and tracks the S&P Global 1200 Consumer Staples Capped Index. It has 98 holdings, a 12-month distribution yield of 1.93% and a total expense ratio of 0.41%. It is more expensive than U.S. index ETFs in the same sector like XLP, whose fee is 0.10%. About 58% of asset value is invested in U.S. companies. Large and mega-cap companies represent 86% of assets.

The next table shows the top 10 holdings with fundamental ratios. The portfolio is quite concentrated: their aggregate weight is 49%.

* US ticker for convenience, but the fund holds shares in the primary exchange. Ratios: Portfolio123

Since 10/1/2006, KXI has underperformed the US sector benchmark XLP by 1.7 percentage point in annualized return, and shows a deeper maximum drawdown. However, the correlation between the two funds is high: 0.94.

In summary, KXI is a good instrument for investors seeking international exposure in a defensive sector. It is not currency-hedged, which may be a bad point or a good one depending on one’s expectation about the dollar. The portfolio is quite heavy in the top two holdings: Costco and Coca-Cola represent 16.5% of asset value together. These are time-tested companies, but investors who want a more diversified portfolio may prefer the 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 0.0432 (or price/earnings below 23.15) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to 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: