SDIV - SDIV: Upgrading To Buy On Valuation Positive Price Action Signals

2023-06-12 07:08:32 ET

Summary

• International high-dividend equities are priced inexpensively compared to large-cap US stocks.
• I am upgrading the Global X SuperDividend ETF to a buy based on valuations and a potential bullish technical turn.
• SDIV features a net expense ratio of 0.58% and a trailing 12-month dividend yield of 13.9%, with high exposure to Mortgage REITs and the volatile Energy and Materials sectors.

So, what's on the cheap right now? International equities and the high dividend factor. Most investors have heard the common refrain that lower P/E multiples are found away from large-cap US companies. While that's true, I assert there is an even better spot if you are seeking deep value.

International high-dividend equities are priced with single-digit P/E multiples, and I am profile one such fund today. Contrast that to large-cap domestic stocks that are near 19x. I am upgrading the Global X SuperDividend ETF (SDIV) to a buy based on valuation and what could be a bullish turn in ex-US high-yielders.

Value Away From The States

According to the issuer , SDIV accesses 100 of the highest dividend-paying equities around the world, potentially increasing a portfolio's yield. The fund has made monthly distributions for 11 years running. Global X makes the case that investing in equities from around the globe can help diversify both geographic and interest rate exposure.

SDIV features a net expense ratio near the industry average at 0.58% and total net assets have sunk lately, dropping under $800 million. Holding 129 individual equities, the ETF trades with a 30-day median bid/ask spread of 14 basis points, so using limit orders during periods of light intraday liquidity is prudent. SDIV's trailing 12-month dividend yield is extremely high for an ETF at 13.9% while the current SEC yield is 11.9%.

Digging into the portfolio, the allocation plots on the far-left portion of the Morningstar Style Box. Along with that stark value tilt, there's high exposure to often-risky small caps stocks. More than half of the portfolio is considered small, and its weighted average market cap is just $3.3 billion.

Global X lists the 2023 earnings multiple at a dirt-cheap 6.6 as of June 8, 2023, while it trades sharply under book value. Compared to the S&P 500, SDIV features a negative beta while correlating highly with movements in the non-US-developed MSCI EAFE Index, so there are diversification benefits here, too. Returns and price action have been dreadful in the last year, leading to a very weak momentum factor score.

SDIV: Strong Value & Small Cap Tilts

Making the allocation so risky is exceedingly high exposure to Mortgage REITs and the volatile Energy and Materials sectors. Recall that commodities peaked a year ago, and the Real Estate sector has actually underperformed Energy in that span.

I see those areas as being undervalued today given such pessimism baked into the housing market and oil & gas spaces. I also like that investors get non-US diversification with SDIV - JPMorgan Asset Management has already called the new regime in favor of foreign stocks.

SDIV: Heavy Into Real Estate, Materials, Energy, Emerging Markets

Cyclical and Value Sector Struggle YoY

A New International Bull Market Underway?

Seasonally, SDIV tends to consolidate on a total return basis through Q3. There is a bit of a rally consisting of higher lows to an eventual peak in February, according to data from Equity Clock . Overall, though, seasonals do not sit too well with the ETF, I concede.

SDIV: Sideways Summer Seasonal Trends

The Technical Take

With an extremely attractive valuation and what appears to be a turn in relative strength favoring a globally diversified asset allocation approach, SDIV's chart shows some signs of life. Notice in the chart below that the fund has put in a bullish RSI momentum divergence pattern. The fund notched a lower low (an all-time low) at the turn of the month, but that dip came on an improvement in the RSI index at the top of the graph.

What's more, the $22 spot is now a key level - that was the October 2022 nadir and where the flattening 50-day moving average comes into play. While the long-term 200-day remains bearishly downward sloping, I see the possibility of a retest of that line, and perhaps a move toward next resistance in the $28 to $29 zone before long. Meanwhile, holders are paid to wait.

SDIV: Bullish RSI Divergence, Eyeing $22

The Bottom Line

I am upgrading SDIV from sell to buy. It was nearly a year ago when I issued a sell rating on the fund, and after steep losses, I see the ETF as being a solid value play now. Furthermore, relative strength trends appear to favor non-US equities. There is still work to do for the embattled Real Estate, Energy, and Materials sectors to re-assert leadership seen in 2021 and early 2022.

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