2023-08-16 14:52:14 ET
Summary
- Transportation is the only industrial subsector with a good value score.
- Building/construction/electric equipment is the most overvalued one.
- Fast facts on Invesco S&P 500® Equal Weight Industrials ETF, an equal-weight alternative to XLI.
- 10 industrial stocks cheaper than their peers in August.
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 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 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 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 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 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). 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.
VS | QS | EY | SY | FY | ROE | GM | EYh | SYh | FYh | ROEh | GMh | RetM | RetY | |
Aerospace+Defense | -20.21 | -13.33 | 0.0480 | 0.5654 | 0.0254 | 15.36 | 21.42 | 0.0515 | 0.7311 | 0.0369 | 20.21 | 22.00 | -2.83% | 1.94% |
Building+Equipment | -43.17 | 18.22 | 0.0267 | 0.2525 | 0.0167 | 11.30 | 32.68 | 0.0415 | 0.7826 | 0.0226 | 9.78 | 27.01 | -0.10% | 25.55% |
Machinery+Conglomerates | -20.51 | 8.23 | 0.0417 | 0.3438 | 0.0250 | 21.60 | 39.77 | 0.0475 | 0.5192 | 0.0296 | 19.37 | 37.91 | -1.95% | 15.98% |
Services+Distribution | -24.17 | 15.92 | 0.0341 | 0.3051 | 0.0194 | 34.25 | 45.76 | 0.0389 | 0.4372 | 0.0277 | 24.64 | 49.28 | -3.16% | 6.45% |
Transportation | 7.68 | 11.58 | 0.0543 | 0.9400 | 0.0193 | 32.38 | 24.06 | 0.0541 | 0.7313 | 0.0205 | 24.42 | 26.56 | -4.96% | -0.82% |
Value and Quality Chart
The next chart plots the Value and Quality Scores by subsector (higher is better).
Value and quality in industrials (Chart: author; data: Portfolio123)
Evolution Since Last Month
The value score has deteriorated in transportation and improved in other subsectors.
Variations in value and quality (Chart: author; data: Portfolio123)
Momentum
The next chart plots momentum based on median returns by subsector.
Interpretation
Transportation is the only undervalued industrial subsector relative to 11-year averages, despite a recent deterioration in value score. Its quality score is also above the historical baseline. Other subsectors are overvalued by over 20%. Overvaluation may be partly offset by a good quality score for building/construction/electric equipment and services/distribution. However, the former is the most overvalued subsector. Aerospace/defense has both value and quality scores below the baseline.
Focus on RSPN
Invesco S&P 500® Equal Weight Industrials ETF ( RSPN ) started investing operations on 11/01/2006 and tracks the S&P 500 Equal Weight Industrials Index. It has a total expense ratio of 0.40%, whereas XLI and FIDU charge only 0.10% and 0.08%, respectively.
The fund holds 77 stocks as of writing. All positions have the same weight after every rebalancing, but they may drift with price action. The next table shows the top 10 holdings now with fundamental ratios. These are the constituents with the highest momentum since the last rebalancing. Their aggregate weight is 15.2% of asset value.
Ticker | Name | Weight% | EPS growth %TTM | P/E TTM | P/E fwd | Yield% |
Old Dominion Freight Line, Inc. | 1.69 | 6.68 | 35.61 | 38.01 | 0.39 | |
United Rentals, Inc. | 1.56 | 35.87 | 14.66 | 12.04 | 1.23 | |
Carrier Global Corp. | 1.54 | -19.54 | 21.99 | 21.30 | 1.34 | |
FedEx Corp. | 1.50 | 8.32 | 17.14 | 15.26 | 1.90 | |
Caterpillar, Inc. | 1.49 | 28.61 | 17.26 | 14.00 | 1.87 | |
Leidos Holdings, Inc. | 1.48 | -0.34 | 19.02 | 14.62 | 1.48 | |
Broadridge Financial Solutions, Inc. | 1.48 | 16.42 | 34.15 | 23.62 | 1.77 | |
Jacobs Solutions, Inc. | 1.48 | 62.98 | 23.51 | 18.59 | 0.76 | |
J.B. Hunt Transport Services, Inc. | 1.48 | -7.69 | 24.36 | 25.93 | 0.84 | |
Automatic Data Processing, Inc. | 1.47 | 17.19 | 30.58 | 27.48 | 1.99 |
The heaviest industry in the portfolio is machinery (23% of assets).
RSPN has outperformed XLI by 1% in annualized return since November 2006. Risk metrics are similar (drawdown and volatility).
Total Return | Annual. Return | Drawdown | Sharpe | Volatility | |
RSPN | 408.39% | 10.18% | -60.87% | 0.55 | 19.97% |
XLI | 334.51% | 9.16% | -62.26% | 0.5 | 19.68% |
RSPN is a good instrument for investors seeking an ETF in industrials with a lower exposure to large companies.
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 0.0543 (or price/earnings below 18.42) 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.
C.H. Robinson Worldwide, Inc. | |
Builders FirstSource, Inc. | |
Titan International, Inc. | |
Vontier Corp. | |
Caterpillar, Inc. | |
United Airlines Holdings, Inc. | |
Insperity, Inc. | |
Robert Half, Inc. | |
Matson, Inc. | |
Wabash National Corp. |
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:
RSPN: Industrials Dashboard For August