VNT - RSPN: Industrials Dashboard For November

2023-11-15 10:36:14 ET

Summary

• Transportation is the only industry with a good value score.
• Invesco S&P 500® Equal Weight Industrials ETF provides an edge in risk and valuation over capital-weighted ETFs.
• 10 stocks cheaper than their peers in November.

This monthly article series shows a dashboard with aggregate subsector metrics in industrials. It is also a review of sector exchange-traded funds, or ETFs, like Industrial Select Sector SPDR® Fund ETF (XLI), Fidelity® MSCI Industrials Index ETF (FIDU) and Invesco S&P 500® Equal Weight Industrials ETF (RSPN), whose largest 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 subsector : Earnings Yield ("EY"), Sales Yield ("SY"), Free Cash Flow Yield ("FY"), Return on Equity ("ROE"), Gross Ma RSPN n ("GM"). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on the 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 nonavailable 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 into 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 transportation in the table below is the 11-year average of the median Earnings Yield in transportation 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). In 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 subsector (higher is better).

Evolution since last month

The value score has improved in building/construction equipment and machinery/conglomerates, and deteriorated in aerospace/defense and transportation.

Momentum

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

Interpretation

Industrials are the second most overvalued sector after technology according to my monthly S&P 500 dashboard . Transportation is the only undervalued subsector relative to 11-year averages. Machinery/conglomerates are moderately overvalued, by about 9 %relative to the historical baseline. Other subsectors are overvalued by 20% to 30%. Overvaluation may be partly offset by a good quality score for building/construction/electric equipment and services/distribution. Aerospace/defense is below the historical baseline regarding both value and quality scores.

Focus on RSPN

Invesco S&P 500® Equal Weight Industrials ETF has been tracking the S&P 500 Equal Weight Industrials Index since 11/01/2006. It has a total expense ratio of 0.40%, whereas XLI and FIDU charge only 0.10% and 0.08%, respectively. It is a significant premium for a quarterly rebalancing.

The fund holds a portfolio of 77 stocks as of writing. All positions have the same weight after every rebalancing, but they drift with price action. Weights are now between 0.81% and 1.53%, whereas the heaviest positions in the capital-weighted ETF XLI are over 4%. The next table lists the top 10 holdings, representing 14.86% of asset value. These are the constituents with the highest price return since the last rebalancing.

The heaviest industries in the portfolio are machinery (21.8%) and aerospace/defense (15.5%). RSPN and XLI have similar price-to-earnings ratios. However, RSPN is significantly cheaper in price/sales and price/cash flow, as reported in the next table.

RSPN has outperformed XLI by 1% in annualized return since its inception in November 2006. Risk metrics are similar (drawdown and volatility).

In summary, Invesco S&P 500® Equal Weight Industrials ETF provides exposure to industrials with a lower risk related to large companies and a more attractive valuation than capital-weighted ETFs.

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 transportation company with an Earnings Yield above 0.0537 (or price/earnings below 18.62) is in the better half of the subsector 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 in the long term, not the result of an analysis of each stock.

For further details see: