2023-09-18 11:30:00 ET
Summary
- The consumer discretionary sector is close to 11-year averages regarding valuation metrics.
- Durables/apparel and consumer services look attractive, whereas the auto/components industry is overvalued.
- Consider VCR as an alternative to XLY.
- Finally, here are 9 stocks cheaper than their sectoral peers in September 2023.
This monthly article series shows a dashboard with aggregate sub-sector metrics in Consumer Discretionary. It is also a top-down analysis of sector ETFs like the Consumer Discretionary Select Sector SPDR ETF ( XLY ) and the Vanguard Consumer Discretionary ETF ( VCR ), 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 sub-sector : 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 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 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 retailing in the table below is the 11-year average of the median Earnings Yield in retail 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. A floor of -100 is set for VS and QS when the calculation goes below this value. It may happen when metrics in a sub- sector are very bad.
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 | |
Auto + Components | -10.81 | -13.98 | 0.0758 | 1.2373 | 0.0223 | 14.07 | 21.71 | 0.0602 | 1.5084 | 0.0374 | 18.81 | 22.33 | -1.41% | -5.69% |
Durables + Apparel | 27.91 | -0.57 | 0.0669 | 0.8615 | 0.0449 | 23.32 | 34.22 | 0.0530 | 0.7046 | 0.0332 | 18.72 | 46.03 | -4.68% | 22.18% |
Retailing | -4.11 | 8.54 | 0.0487 | 0.6171 | 0.0444 | 31.45 | 34.00 | 0.0490 | 0.8389 | 0.0387 | 25.65 | 36.00 | -2.81% | 19.05% |
Services | 9.94 | 14.72 | 0.0326 | 0.4017 | 0.0248 | 16.79 | 38.13 | 0.0313 | 0.4026 | 0.0197 | 13.79 | 35.42 | -2.13% | 17.95% |
Value and Quality chart
The next chart plots the Value and Quality Scores by sub-sector (higher is better).
Evolution since last month
Valuation has significantly improved in the durables and apparel sub-sector.
Momentum
The next chart plots momentum scores based on median returns.
Interpretation
The consumer discretionary sector as a whole was close to its 11-year averages in valuation when I published my broad market dashboard for September . Durables and apparel look quite attractive: this sub-sector is undervalued by about 28% regarding my metrics, and the quality score is close to the baseline. Consumer services also look good, with value and quality scores above the baseline. This sub-sector includes hotels, restaurants, leisure and diversified services. The less attractive industry is auto and components.
Focus on VCR
Vanguard Consumer Discretionary ETF ((VCR)) started investing operations on 01/26/2004 and tracks the MSCI US IMI Consumer Discretionary 25/50 Index. It has 308 holdings and a total expense ratio of 0.10% (on par with XLY). It is also available as a mutual fund ( VCDAX ).
The next table shows the top 10 holdings with fundamental ratios and dividend yields. Their aggregate weight is 61.1%, with 37% in the top 2 names: Amazon and Tesla represent 22% and 15% of the fund's asset value.
Ticker | Name | Weight | EPS ttm growth % | P/E ttm | P/E fwd | Yield % |
Amazon.com, Inc. | 22.21% | 12.55 | 111.63 | 63.39 | 0 | |
Tesla, Inc. | 14.98% | 27.36 | 77.85 | 81.68 | 0 | |
The Home Depot, Inc. | 6.76% | -1.61 | 20.07 | 21.15 | 2.60 | |
McDonald's Corp. | 4.18% | 33.85 | 25.61 | 24.05 | 2.19 | |
Lowe's Cos., Inc. | 2.80% | -19.97 | 21.67 | 16.37 | 2.00 | |
NIKE, Inc. | 2.56% | -14.00 | 29.83 | 25.85 | 1.41 | |
Booking Holdings, Inc. | 2.39% | 208.74 | 27.29 | 21.96 | 0 | |
Starbucks Corp. | 2.28% | -7.65 | 29.30 | 27.83 | 2.20 | |
The TJX Cos., Inc. | 2.18% | 21.64 | 27.11 | 24.88 | 1.44 | |
O'Reilly Automotive, Inc. | 1.18% | 13.84 | 25.81 | 24.61 | 0 |
Ratios by Portfolio123
VCR has outperformed XLY by a very short margin since 2/1/2004: 33 bps in annualized return. It is also a bit more volatile, and as a result the two funds have almost the same Sharpe ratio (risk-adjusted performance).
Total Return | Annual Return | Drawdown | Sharpe | Volatility | |
VCR | 646.40% | 10.79% | -61.54% | 0.54 | 19.85% |
XLY | 604.49% | 10.46% | -59.05% | 0.55 | 18.83% |
Data calculated with Portfolio123
In summary, VCR is a good product with cheap management fees for investors seeking capital-weighted exposure in consumer cyclicals. It holds 308 stocks including large, mid- and small caps, whereas XLY has only 54 holdings in larger companies. However, it doesn't make a significant difference in performance since 2004. VCR is a good choice for long-term investors, but XLY is a better instrument for tactical allocation and trading, thanks to higher trading volumes. Both funds are overweight in two companies: Amazon and Tesla. Investors seeking a more diversified portfolio may prefer Invesco S&P 500 Equal Weight Consumer Discretionary ETF ( RSPD ).
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 retail company with an Earnings Yield above 0.0487 (or price/earnings below 20.53) is in the better half of the industry regarding this metric. A Dashboard List is sent every month 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 several weeks ago based on data available at this time.
Chico's FAS, Inc. | |
Designer Brands, Inc. | |
Victoria's Secret & Co. | |
Asbury Automotive Group, Inc. | |
Williams-Sonoma, Inc. | |
Expedia Group, Inc. | |
Dave & Buster's Entertainment, Inc. | |
Bloomin' Brands, Inc. | |
Sally Beauty Holdings, Inc. |
It is a rotating list with a statistical bias toward excess returns on the long term, not the result of an analysis of each stock.
For further details see:
VCR: Consumer Discretionary Dashboard For September