COKE - RHS: Consumer Staples Dashboard For May

2023-05-18 16:38:57 ET

Summary

• All consumer staples subsectors have either a bad value score, or a bad quality score, or both.
• Personal care is the most overvalued subsector, and tobacco is the worst-ranked regarding quality.
• Invesco S&P 500® Equal Weight Consumer Staples ETF is an equal-weight alternative to XLP.
• We present 6 stocks cheaper than their peers in May.

This monthly article series shows a dashboard with aggregate industry metrics in consumer staples. It is also a review of sector exchange-traded funds, or ETFs, like the Consumer Staples Select Sector SPDR ETF ( XLP ) and the Invesco S&P 500 Equal Weight Consumer Staples ETF ( RHS ), whose holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italics 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 split 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 changes are an improvement of value score in staple/food retail and personal care, and a deterioration of both scores for food.

Momentum

The next chart plots momentum based on median returns by subsector.

Interpretation

All subsectors have either a bad value score, or a bad quality score, or both. None of them looks really attractive. Personal care is the most overvalued one. Tobacco is undervalued by about 30% relative to 11-year averages, but it also has the worst quality score. A note of caution: only five tobacco companies are in my reference universe. Therefore, statistics are less reliable than in other industries.

Fast facts On RHS

Invesco S&P 500® Equal Weight Consumer Staples ETF has been tracking the S&P 500 Equal Weight Consumer Staples Index since 11/01/2006. It has 37 holdings and a total expense ratio of 0.40%, which is significantly more expensive than the capital-weighted fund XLP (0.10%).

All positions have the same weight after every rebalancing, but they may drift with price action. The next table lists the current top 10 holdings, which have an aggregate weight of 30%. These are the constituents with the highest momentum since the last rebalancing. Risks related to individual companies are lower than in XLP, where the top 10 holdings weigh over 60% of assets, and the top name, The Procter & Gamble Company ( PG ), is over 14%.

RHS is cheaper than XLP regarding the usual valuation ratios, as reported in the next table.

Data: Fidelity.

It has slightly outperformed XLP since inception, but the difference is less than 1% in annualized return. Risk metrics are quite close too (maximum drawdown and volatility in the next table).

Data and calculations: Portfolio123.

However, the equal-weight fund has underperformed in the last 5 years (next chart).

In summary, Invesco S&P 500® Equal Weight Consumer Staples ETF is a solution for investors seeking exposure to consumer staples and avoid concentration in the largest companies of the sector. It is slightly better than XLP in valuation and past performance. However, liquidity makes XLP a better instrument for tactical allocation and trading.

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 0.0483 (or price/earnings below 20.70) 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 showing long-term excess return, not the result of an analysis of each stock.

For further details see: