PEP - VDC: Consumer Staples Dashboard For December

2023-12-17 04:59:09 ET

Summary

• The consumer staples sector is overvalued by about 6% relative to 11-year averages.
• Staple/food retail has good value and quality scores.
• VDC fast facts.
• 9 stocks cheaper than their peers in December.

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 ETFs like the Consumer Staples Select Sector SPDR ETF ( XLP ) and the Vanguard Consumer Staples ETF ( VDC ), 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 deteriorated in the tobacco, personal care, food and household product industries. Quality has improved in staple/food retail and household products.

Momentum

The next chart plots momentum data.

Interpretation

The consumer staples sector is overvalued by about 6% relative to 11-year averages according to my S&P 500 monthly dashboard . Tobacco is the most undervalued industry in the sector, but its quality score is significantly below the historical baseline. Moreover, there are only five tobacco companies in this universe, so statistics may be less reliable than in other industries. Household products are undervalued by about 24% relative to the historical baseline, but they also have a quality problem. Staple/food retail may be more attractive: it is undervalued by 17%, and quality looks better. Food, beverage and personal care products are close to their baselines regarding both valuation and quality.

VDC fast facts

Vanguard Consumer Staples ETF has been tracking the MSCI USA IMI Consumer Staples 25/50 Index since 01/26/2004. It has 106 holdings, a trailing 12-month distribution yield of 2.49% and a total expense ratio of 0.10%, the same as XLP.

The next table lists the top 10 holdings with some fundamental ratios. The portfolio is very concentrated: they represent 61% of asset value. In particular, the fund is quite exposed to risks related to the top five names, whose weights are between 7% and 13%.

Ratios: Portfolio123

VDC has slightly outperformed XLP since inception, but the difference in annualized return is barely significant (47 bps). The two funds have similar risk metrics (drawdown and volatility in the table below).

In summary, Vanguard Consumer Staples ETF is a fund with cheap fees for investors seeking capital-weighted exposure in consumer staples. It holds much more stocks than XLP (currently 106 vs. 40), but this has not made much difference in return since 2004. For long-term investors, XLP and VDC are equivalents. However, liquidity makes XLP a better choice for tactical allocation and trading. VDC is significantly exposed to risks related to the top five holdings, which weigh 45% together. Investors seeking a more diversified 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 0.0499 (or price/earnings below 20.04 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: