XLP: Consumer Staples Dashboard For February (NYSEARCA:XLP)

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), 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.

*Capped to 100 for convenience

Value And Quality chart

The next chart plots the Value and Quality Scores by industry (higher is better).

Evolution since last month

The tobacco industry’s value score went down, but it was exceptionally high and it is still excellent.

Momentum

The next chart plots momentum data. Tobacco is leading in monthly and annual median returns.

Interpretation

For months, the tobacco industry has been the most attractive consumer defensive subsector regarding value and quality scores. It has also been the best performing one in one year and one month. However, the sample size is a bit small: there are only five tobacco companies in my reference universe. Household products are close below the historical baseline in value, and above it in quality. Food, beverage and personal care products are slightly overvalued relative to 11-year averages (by 12% to 16%). It may be justified by a good quality score for personal care. Staple and food retail is the less attractive industry here. Quality has improved and it is now on the baseline, but overvaluation is about 30% relative to historical averages.

Focus on XLP

The Consumer Staples Select Sector SPDR ETF (XLP) has been following the Consumer Staples Select Sector Index since 12/22/1998. It has a total expense ratio of 0.12%, which is a bit more expensive than the consumer staples ETF by Fidelity, FSTA (0.08%). However, there is no material difference in performance after fees between FSTA and XLP in annualized return since FSTA inception in 2013 (9.98% vs. 10.42%). Risk measured in drawdown and volatility is also similar.

As of writing, the fund holds 33 stocks. The next table shows the top 10 holdings with basics ratios and dividend yields. Their aggregate weight is about 72%, with over 46% concentrated in the top four names.

In summary, XLP is a good instrument for investors seeking a capital-weighted exposure in consumer staples. It has slightly higher fees and holds less stocks than FSTA (33 vs.105), but there is no significant difference in past performance and risk metrics. Both products are equivalents for long-term investors, but liquidity makes XLP preferable for trading and tactical allocation. For investors willing to avoid the concentration in top holdings, there is a balanced alternative: the Invesco S&P 500® Equal Weight Consumer Staples ETF (RHS)

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 0.0475 (or price/earnings below 21.05) is in the better half of the industry 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.

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.