FUTY: Utilities Dashboard For April

seekingalpha04-20

Gas and water utilities are slightly undervalued relative to the historical baseline.Electricity and multi-utilities have a higher quality score.Fidelity MSCI Utilities Index ETF is an alternative to ...

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Monty Rakusen This monthly article series shows a dashboard with aggregate industry metrics in utilities. It is also a top-down analysis of sector exchange-traded funds, or ETFs, like Utilities Select Sector SPDR ETF (XLU) and Fidelity MSCI Utilities Index ETF (NYSEARCA:FUTY), 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 hardware in the table below is the 11-year average of the median Earnings Yield in hardware companies. The Value Score (\"VS\") is defined as the average difference in % between two valuation ratios ((EY, SY)) and their baselines (EYh, SYh). FY is reported for consistency with other sector dashboards, but it is ignored in utilities’ score to avoid some inconsistencies. In 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 two valuation ratios are of equal importance. Current data The next table shows the metrics and scores as of writing. Columns stand for all the data defined above.     VS QS EY SY FY ROE GM EYh SYh FYh ROEh GMh RetM RetY   Gas 9.30 1.56 0.0592 0.5420 -0.0367 8.64 40.33 0.0476 0.5752 -0.0616 9.21 36.90 -0.36% -12.15%   Water 8.83 -3.70 0.0453 0.2084 -0.0720 8.41 59.24 0.0359 0.2278 -0.0335 9.77 55.61 -2.80% -20.46%   Electricity and Multi 2.03 7.74 0.0553 0.4596 -0.0931 10.44 42.37 0.0503 0.4883 -0.0552 9.74 39.11 0.41% -5.87%   Click to enlarge Value and Quality chart The next chart plots the Value and Quality Scores by industry. Higher is better.   Value and quality in utilities (Chart: author; data: Portfolio123) Evolution since last month The value score has improved across the sector.   Variation in value and quality (Chart: author; data: Portfolio123) Momentum The next chart plots momentum scores based on median returns.   Momentum in utilities (Chart: author; data: Portfolio123) Interpretation Gas and water utilities are undervalued by about 8% based on 11-year averages, and their quality score is close to the historical baseline. Electricity and multi-utilities are almost at their baseline regarding valuation, but have a higher quality score. Fast facts on FUTY Fidelity MSCI Utilities Index ETF started investing operations on 10/21/2013 and tracks the MSCI USA IMI Utilities 25/50 Index. The expense ratio is similar to XLU (0.08% vs. 0.09%). The portfolio is quite concentrated: the top 10 holdings, listed in the next table with fundamental ratios, represent 52.7% of asset value. The top 4 names weigh between 5% and 12%.   Ticker Name Weight% EPS growth %TTM P/E TTM P/E fwd Yield%   NEE NextEra Energy, Inc. 11.94 72.53 17.75 18.82 3.22   SO The Southern Co. 7.12 10.83 19.47 17.58 3.97   DUK Duke Energy Corp. 6.79 10.82 26.01 16.08 4.27   CEG Constellation Energy Corp. 5.37 1126.34 36.72 24.28 0.77   AEP American Electric Power Co., Inc. 4.12 -5.52 19.44 14.75 4.26   SRE Sempra 4.12 44.73 14.29 14.23 3.62   D Dominion Energy, Inc. 3.75 113.36 21.23 17.12 5.50   EXC Exelon Corp. 3.4 6.27 15.70 15.07 4.14   PCG PG&E Corp. 3.09 21.97 15.75 12.25 0.24   PEG Public Service Enterprise Group, Inc. 3.03 148.59 12.70 17.74 3.69   Click to enlarge Ratios: Portfolio123. FUTY is right behind XLU regarding total return since inception. Nevertheless, the gaps in annualized return, maximum drawdown, volatility and Sharpe ratio are insignificant, as reported in the next table.     Total Return Annual. Return Drawdown Sharpe ratio Volatility   FUTY 128.95% 8.23% -36.44% 0.54 14.65%   XLU 133.61% 8.44% -36.07% 0.54 14.87%   Click to enlarge Valuation ratios are also very close:     FUTY XLU   Price/trailing earnings 17.14 17.12   Price/book 1.84 1.87   Price/sales 2.1 2.19   Price/cash flow 7.48 7.84   Click to enlarge Fidelity MSCI Utilities Index ETF provides a capital-weighted exposure to utilities for a cheap fee. It has more holdings than XLU (currently 70 vs. 31), but performance, risk and valuation metrics are almost on par. These two funds are equivalents for long-term investors. Nonetheless, XLU is more suitable for trading strategies, thanks to much higher trading volumes. Both funds have a high exposure to the top holding NextEra Energy. Investors looking for a more balanced portfolio may prefer Invesco S&P 500 Equal Weight Utilities ETF (RSPU). 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 gas utilities company with an Earnings Yield above 0.0592 (or price/earnings below 16.89) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to our Investing Group subscribers, with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The stocks below are part of the list sent to subscribers a few weeks ago, based on data available at this time.   BKH Black Hills Corp.   ALE ALLETE, Inc.   OGS ONE Gas, Inc.   ETR Entergy Corp.   DTE DTE Energy Co.   EXC Exelon Corp.   PNW Pinnacle West Capital Corp.   PCG PG&E Corp.   NWN Northwest Natural Holding Co.   AWR American States Water Co.   Click to enlarge  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.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428692980"}