Judging A Sector By Its History

5/15/2017


Not all sectors behave the same. Technology stocks customarily carry high P/E ratios, while utilities tend to exhibit low valuations. Health-care stocks have historically generated robust growth, while operating momentum is usually weaker for the telecom sector.

Recognizing these idiosyncrasies, we looked at how the 11 sectors in the S&P 1500 Index currently look compared to their own historical norms. To do so, we pulled month-end sector averages for key metrics over the past decade. We evaluated sectors from three angles: valuation, operating growth, and stock performance.

With genuinely cheap stocks in short supply, the consumer-discretionary sector is one of few pockets that looks attractively priced right now, as shown below. The average discretionary stock trades at 21 times trailing earnings, only slightly above its historical averages. Based on average P/E for estimated current-year profits, discretionary stocks trade at a smaller premium to long-term norms than any other sector. Note that real estate stocks look cheap on a trailing basis, but their average forward P/E ratio is sharply above historical norms.


BEST VALUE — CONSUMER DISCRETIONARY

We find few pockets of attractive valuations, based on comparing each S&P 1500 sector's current average P/E ratio and Quadrix Value score to historical norms. The 10-year average is based on month-end data and excludes P/E ratios below zero or above 75.

Trailing P/E Ratio
Forward P/E Ratio
Quadrix Value Score
S&P 1500 Sector
Current
10-Year
Average
Current
10-Year
Average
Current
10-Year
Average
Consumer discretionary
21
20
20
19
70
59
Consumer staples
24
20
22
19
53
52
Energy
31
19
30
19
47
59
Financials
19
17
17
16
66
64
Healthcare
28
23
24
20
51
51
Industrials
23
20
21
19
56
59
Materials
23
20
21
18
59
58
Real Estate
32
35
36
32
38
34
Technology
28
25
24
20
51
51
Telecom
34
23
25
22
59
63
Utilities
20
17
20
16
58
62
S&P 1500
24
21
22
19
57
56

We find unusually strong operating momentum among technology companies. No other sector is currently delivering stronger 12-month growth for per-share profits and revenue relative to its historical averages. Elsewhere, telecom stocks are generating uncommonly high sales growth, though per-share profits are notably weak. Profit growth has rarely been so strong for the average utility stock in the past decade, despite roughly flat revenue.


STRONGEST OPERATING MOMENTUM — TECHNOLOGY

The technology sector is currently generating especially strong profit and sales growth relative to its historical norms. The 10-year average is based on month-end data and excludes 12-month increases or decreases exceeding 75%.

-- 12-Month EPS --
-- 12-Month Sales --
Quadrix
-- Momentum Score --
S&P 1500 Sector
Current
(%)
10-Year
Average
(%)
Current
(%)
10-Year
Average
(%)
Current
10-Year
Average
Consumer discretionary
5
7
8
7
49
52
Consumer staples
6
8
4
7
46
52
Energy
(1)
(1)
(18)
3
47
48
Financials
7
3
8
2
58
50
Healthcare
5
8
10
11
51
57
Industrials
3
7
4
6
48
52
Materials
4
3
1
4
48
48
Real Estate
4
5
3
2
47
52
Technology
9
5
11
8
59
52
Telecom
(19)
(5)
7
5
27
45
Utilities
12
3
2
(1)
59
49
S&P 1500
5
6
5
6
52
52

Nine of 11 sectors have produced unusually strong six-month total returns, none more so than financial stocks, returning 21% on average. Most sectors have also generated robust 12-month returns, again led by financials.


STRONGEST SHARE-PRICE ACTION — FINANCIALS

Most sectors have delivered unusually strong six-month returns relative to their 10-year norms. Historical averages are based on month-end data. Inception is December 1994.

----- 6-Month Total Return -----
----- 12-Month Total Return -----
S&P 1500 Sector
Current
(%)
10-Year
Average
(%)
Avg. Since
Inception
(%)
Current
(%)
10-Year
Average
(%)
Avg. Since
Inception
(%)
Consumer discretionary
14
6
6
14
13
13
Consumer staples
7
7
7
7
14
15
Energy
(4)
4
7
5
7
15
Financials
21
4
7
33
8
15
Healthcare
20
7
8
20
15
18
Industrials
18
7
7
27
12
14
Materials
17
7
6
27
14
12
Real Estate
10
5
7
5
11
15
Technology
19
7
8
39
13
18
Telecom
13
3
5
8
6
11
Utilities
9
5
6
11
11
13
S&P 1500
15
6
7
22
12
14

We repeated this exercise for each of our recommended stocks, comparing their current metrics versus historical norms. Stocks that look especially appealing for value, growth, or share-price action are reviewed below.

Apple's ($153; AAPL) shares have performed unusually well compared to their own historical norms, yet still look cheap compared to other technology stocks. Apple shares have delivered a total return of 39% over the past six months, roughly twice their average six-month return of 16% over the past decade. The stock dipped on Apple's middling March-quarter report, only to rebound to a record high as anticipation builds for the next iPhone, expected to debut this fall. Some analysts envision a scenario in which a radically upgraded iPhone will trigger a "supercycle" of replacements by current users.

At 18 times trailing earnings, Apple shares trade at 0.64 times the average S&P 1500 technology stock, or a 36% discount. The stock has averaged a 20% discount to its sector in the last decade. Apple's forward P/E ratio has averaged a 14% discount to its sector average over the past 10 years. Today, it offers a 28% discount. The forward P/E ratio is based on estimated profits for the current fiscal year, which, in Apple's case, ends in September. Apple is a Buy and a Long-Term Buy.


Higher ticket prices and robust customer demand have helped Carnival ($62; CCL) overcome rising fuel expenses in the past year. Earnings per share surged 68% for the 12 months ended February, well ahead of the company's 10-year average growth of 3%. Revenue per share advanced 10%, double Carnival's historical norm.

Both sales and profits currently stand at all-time highs, as does operating cash flow, up 15% to $5.27 billion for the 12 months ended February. Given management's upbeat comments about strong booking trends and higher ticket prices, Carnival seems capable of continuing its growth trajectory.

Investors have taken note of the robust operating momentum, pushing Carnival shares to an all-time high in May. The stock has delivered a total return of 28% over the past 12 months, easily outpacing its 10-year average of a 7% return. The stock scores above 75 in Quadrix for Momentum, Value, and Performance. Carnival, earning an Overall rank of 98, is a Focus List Buy and a Long-Term Buy.


Comcast ($39; CMCSa) shares have returned 24% including dividends over the past six months, as bullish investor sentiment congealed around the company's upbeat earnings reports, growing base of video subscribers, and expansion into wireless services.

The stock continued its ascent on an announcement that Comcast has partnered with Charter Communications ($325; CHTR), further solidifying its wireless push. Comcast and Charter agreed to share wireless technology and support each other in negotiations with phone makers. The two companies also agreed to avoid making large wireless deals without the other's approval over the next 12 months. Charter had previously said it could launch a wireless service as soon as 2018.

The deal stirred speculation that Comcast and Charter may team up to acquire T-Mobile US ($66; TMUS) or Sprint ($8; S) — or even merge with each other. Although Comcast carries $57.75 billion in net debt on its balance sheet, the company generated $19.79 billion in operating cash flow for the 12 months ended March and $7.39 billion in free cash flow. Comcast, earning a Value score of 68, is a Focus List Buy and a Long-Term Buy.


Top choices from three angles

The stocks immediately below look unusually cheap versus peers on both trailing P/E ratio and P/E ratio based on estimated current-year profits. Based on its trailing P/E, Citrix Systems ($87; CTXS) trades at 0.79 times the average S&P 1500 technology stock, implying a 21% discount. Over the past decade, the stock has traded at 1.42 times its sector on average, a 42% premium. Further below, we screened for stocks performing unusually well versus their own 10-year norms for operating growth and share-price action.

Top Value Plays

------- Trailing P/E Ratio -------
------- Forward P/E Ratio -------
Company (Price; Ticker)
Current
Current/
Sector
Average
10-Year
Average/
Sector
Average
Current
Current/
Sector
Average
10-Year
Average/
Sector
Average
Apple ($153; AAPL)
18
0.64
0.80
17
0.72
0.86
Centene ($77; CNC)
16
0.65
0.87
16
0.67
0.95
Citrix Systems ($87; CTXS)
17
0.78
1.42
19
0.78
1.09
D.R. Horton ($33; DHI)
13
0.68
1.04
12
0.71
1.10
Owens Corning ($62; OC)
16
0.66
0.95
16
0.74
1.13
Southwest Air ($58; LUV)
17
0.74
1.08
15
0.72
0.98
VMware ($94; VMW)
19
1.13
1.72
19
0.81
1.63

Top growth plays

12-Month
---- EPS Change ----
12-Mo. Per-Share
--- Sales Change ---
Quadrix Momentum
--------- Score ---------
Company (Price; Ticker)
Recent
(%)
10-Year
Average
(%)
Recent
(%)
10-Year
Average
(%)
Recent
10-Year
Average
App. Materials ($43; AMAT)
75
1
36
4
99
53
Carnival ($62; CCL)
68
3
10
5
89
45
FedEx ($190; FDX)
41
6
21
6
57
51
Lam Research ($149; LRCX)
55
(12)
19
4
99
62
Lowe's ($86; LOW)
20
8
16
9
86
53
Owens Corning ($62; OC)
29
19
13
(3)
50
47
Zions Bancorp ($41; ZION)
80
11
13
(8)
93
44

Top performers

6-Month
--- Total Return ---
12-Month
--- Total Return ---
YTD
Total
Return
(%)
Quadrix
Perfor-
mance
Score
Company (Price; Ticker)
Current
(%)
10-Year
Average
(%)
Current
(%)
10-Year
Average
(%)
Apple ($153; AAPL)
39
16
67
36
33
87
CDW ($60; CDW)
35
15
45
30
15
82
Comcast ($39; CMCSa)
24
7
27
15
14
66
Ingersoll-Rand ($89; IR)
20
10
36
18
19
85
J.P. Morgan Chase ($87; JPM)
21
6
45
10
2
62
Lam Research ($149; LRCX)
53
7
99
14
42
95
Southwest Airlines ($58; LUV)
38
11
37
21
17
80
Note: Quadrix scores are percentile ranks, with 100 the best.

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