This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages in each industry.

Executive summary

Energy equipment services, oil/gas and metals/mining are significantly underpriced regarding historical averages of the 3 valuation metrics reported hereafter. Energy equipment/services is far below the historical average in profitability measured by return on equity, whereas metals/mining is above it. Paper/wood also looks underpriced and over the profitability baseline by a wide margin, but the price/sales ratio is not so good. Chemicals are moderately overpriced. Packaging and construction materials are less attractive. Packaging is the most overpriced, but it has the best profitability metric, which may partly justify overpricing. All materials industries are above their historical baseline in profitability.

Since last month:

  • P/E has improved in oil/gas and metals, and deteriorated in energy equipment/services, construction materials, and paper/wood.

  • P/S has improved in oil/gas and paper/wood, and deteriorated in metals.

  • P/FCF has significantly improved in energy equipment/services, oil/gas, packaging, and metals.

  • ROE has deteriorated in energy equipment/services and paper/wood.

  • The Energy Select Sector SPDR ETF (XLE) has lagged the SPDR S&P 500 ETF by 2.3%. The Materials Select Sector SPDR ETF (XLB) has outperformed it by 0.3%.

  • The five S&P 500 stocks in energy and materials with the best momentum in 1 month are Baker Hughes, a GE Co. (BHGE), Devon Energy Corp. (DVN), Martin Marietta Materials Inc. (MLM), Marathon Oil Corp. (MRO), and Sealed Air Corp. (SEE).

Some cheap stocks in their industries

The stocks listed below are in the S&P 1500 index, cheaper than their respective industry factor for price/earnings (excluding extraordinary items), price/sales and price/free cash flow. The 10 companies with the highest return on equity are kept in the final selection. Quantitative Risk & Value members have every month an early access to the cheap stock lists in all sectors before they are published in free-access articles. This is not investment advice. Do your own research before buying.

CEIX

CONSOL Energy Inc.

OILGASFUEL

DNR

Denbury Resources Inc.

OILGASFUEL

REGI

Renewable Energy Group Inc.

OILGASFUEL

ASIX

AdvanSix Inc.

CHEM

CC

Chemours Co.

CHEM

LYB

LyondellBasell Industries NV

CHEM

POL

PolyOne Corp.

CHEM

RYAM

Rayonier Advanced Materials Inc.

CHEM

FCX

Freeport-McMoRan Inc.

METAL

STLD

Steel Dynamics Inc.

METAL

Detail of valuation and quality indicators in energy and materials on 3/18/2019

I take 4 aggregate industry factors: price/earnings (P/E), price to sales (P/S), price to free cash flow (P/FCF), return on equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor, I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average (“Avg”) between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above (“D-xxx”).

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Equip./Sces

20.36

24.2

15.87%

0.91

1.73

47.40%

27.56

35.34

22.02%

-11.36

7.34

-18.70

Oil/Gas

12.74

18.53

31.22%

1.74

3.35

47.98%

25.74

29.03

11.33%

4.16

4.47

-0.31

Chemicals

19.24

18.48

-4.13%

1.45

1.21

-19.58%

25.12

25.37

0.98%

11.79

6.74

5.05

Construction Materials

25.46

21.44

-18.77%

1.45

1.16

-25.29%

55.57

40.5

-37.21%

9.29

5.77

3.52

Packaging

20.31

17.96

-13.07%

1.01

0.61

-66.31%

29.73

20.09

-47.97%

19.30

8.34

10.96

Metals/Mining

13.84

19.83

30.19%

1.90

2.65

28.36%

22.83

25.53

10.58%

-3.25

-8.6

5.35

Paper/Wood

13.22

21.27

37.83%

0.79

0.72

-10.18%

14.38

22.81

36.95%

13.40

4.99

8.41

The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors the difference to average is calculated in the direction where positive is good. For valuation ratios, lower is better; for ROE, higher is better. On the charts below, higher is always better.

Price/Earnings relative to historical average:

Price/sales relative to historical average:

Price/free cash flow relative to historical average:

ROE relative to historical average:

Momentum

The next chart compares the price action of XLB and XLE with the benchmark in 1 month.

Chart by TradingView

Valuation may be useful to build portfolios, but it is not a good timing indicator. An objective assessment of systemic risk is also important to manage a portfolio’s exposure to stocks. Quantitative Risk and Value provides investors with a multi-valued risk indicator, a user’s manual with ETF strategies and hedging tactics based on it, plus backtested lists of stocks selected on quantitative value in all sectors.

Disclosure: I am/we are long RYAM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-03-18