VIS: Industrials Dashboard For August

seekingalpha08-17

Monthly article series with subsector metrics in industrials.It is the second most overvalued sector, and aerospace/defense is its least attractive subsector based on value and quality scores.However,...

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href=https://seekingalpha.com/article/4715259-vis-industrials-dashboard-for-august><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Monthly article series with subsector metrics in industrials.It is the second most overvalued sector, and aerospace/defense is its least attractive subsector based on value and quality scores.However,...</p>\n\n<a href=\"https://seekingalpha.com/article/4715259-vis-industrials-dashboard-for-august\">Source 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ETF"},"translate_title":"VIS：八月份工业仪表板","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XLI":1,"VIS":1,"RSPN":1,"FIDU":1,"FDN":0.9,"US30Y.BOND":0.64,"UBER":0.64,"US10Y.BOND":0.64,"US12M.BOND":0.64,"US2Y.BOND":0.64,"US3Y.BOND":0.64,"US5Y.BOND":0.64,"US6M.BOND":0.64,"US7Y.BOND":0.64,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6},"content_text":"Monthly article series with subsector metrics in industrials.It is the second most overvalued sector, and aerospace/defense is its least attractive subsector based on value and quality scores.However, overvaluation may be partly offset by a good quality score for the building/construction/electric equipment subsector.Vanguard Industrials Index Fund ETF Shares is an alternative to XLI for long-term investors.10 industrial stocks cheaper than their peers in August.   thitivong This monthly article series shows a dashboard with subsector metrics in industrials. It is also a review of sector ETFs like Industrial Select Sector SPDR ETF (XLI), Fidelity MSCI Industrials Index ETF (FIDU) and Vanguard Industrials Index Fund ETF Shares (NYSEARCA:VIS), 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 subsector: 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 a trailing 12 month basis. 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 transportation in the table below is the 11-year average of the median Earnings Yield in transportation 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 writing. Columns stand for all the data defined above.     VS QS EY SY FY ROE GM EYh SYh FYh ROEh GMh RetM RetY   Aerospace+Defense -35.30 -11.32 0.0252 0.5378 0.0202 17.08 20.10 0.0477 0.6598 0.0338 19.94 21.91 2.49% 35.48%   Building+Equipment -35.36 40.25 0.0332 0.2532 0.0176 15.48 37.55 0.0404 0.6700 0.0238 10.35 28.68 -1.76% 22.48%   Machinery+Conglomerates -17.11 8.22 0.0383 0.2878 0.0300 20.57 42.35 0.0446 0.4765 0.0293 19.39 38.39 -3.57% 16.18%   Services+Distribution -35.71 14.65 0.0300 0.2200 0.0142 34.47 48.70 0.0370 0.3936 0.0254 26.42 49.28 0.64% 24.15%   Transportation -30.07 0.37 0.0374 0.7810 0.0067 28.36 23.40 0.0527 0.7393 0.0202 25.24 26.48 -3.13% 0.81%   Click to enlarge  Value and Quality chart  The next chart plots the Value and Quality Scores by subsector (higher is better).   Value and quality in industrials (Chart: author; data: Portfolio123) Evolution since last month The most notable changes are a deterioration of value score in transportation and an improvement of quality score in the aerospace/defense and building/equipment subsectors.   Variations in value and quality (Chart: author; data: Portfolio123) Momentum The next chart plots momentum data.   Momentum in industrials (Chart: author; data: Portfolio123) Interpretation Industrials are the second most overvalued sector based on my S&P 500 monthly dashboard. The machinery and conglomerates subsector is overvalued by 17% relative to 11-year averages, while other industries are overvalued by 30% to 35%. Overvaluation may be partly justified by a good quality score for building/construction/electric equipment, and to a lesser extent for services/distribution. Combining value and quality scores, aerospace/defense is the least attractive subsector. Focus on VIS Vanguard Industrials ETF has been tracking the MSCI US IMI Industrials 25/50 Index since 09/23/2004. It has a total expense ratio of 0.10%, marginally pricier than XLI (0.09%) and FIDU (0.08%). The same portfolio is available through a mutual fund (VINAX). As of writing, the fund has 385 holdings. The next table lists the top 10 names with fundamental ratios. They represent 26.4% of asset value, and the heaviest position weighs 3.57%. Therefore, the portfolio is well-diversified and risks related to individual companies are low to moderate.   Ticker Name Last EPS growth %TTM P/E TTM P/E fwd Yield%   GE GE Aerospace 3.57% -48.62 40.33 40.78 0.66   CAT Caterpillar, Inc. 3.31% 36.57 15.74 15.63 1.63   RTX RTX Corp. 2.99% -54.17 68.48 21.67 2.13   UNP Union Pacific Corp. 2.88% -2.86 22.89 21.88 2.20   HON Honeywell International, Inc. 2.56% 8.53 22.63 19.61 2.18   ETN Eaton Corp. Plc 2.34% 34.35 33.27 28.29 1.24   UBER Uber Technologies, Inc. 2.32% 539.27 78.25 69.30 0   LMT Lockheed Martin Corp. 2.25% 0.78 20.33 21.10 2.25   BA The Boeing Co. 2.12% 24.85 N/A N/A 0   ADP Automatic Data Processing, Inc. 2.07% 10.90 28.97 26.29 2.12   Click to enlarge The heaviest industry in the fund is aerospace/defense (19.3%). VIS has many more holdings than XLI (385 large to small caps vs. 81 large and mid-caps). However, their return and risk metrics since VIS inception are almost identical, as reported below.     Total Return Annual. Return Drawdown Sharpe Volatility   VIS 563.10% 9.98% -63.51% 0.52 19.18%   XLI 557.96% 9.94% -62.26% 0.52 18.69%   Click to enlarge In summary, Vanguard Industrials Index Fund ETF Shares is a well-diversified fund with cheap management fees for investors seeking capital-weighted exposure to industrials. VIS and XLI are equivalents for buy-and-hold investors. However, higher trading volumes make XLI a better instrument for trading and tactical allocation purposes. Investors looking for a more balanced portfolio may prefer the Invesco S&P 500 Equal Weight Industrials ETF (RSPN). 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 transportation company with an Earnings Yield above 0.0374 (or price/earnings below 26.74) is in the better half of the subsector 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 stocks below are part of the list sent to subscribers a few weeks ago.   SAIC Science Applications International Corp.   POWL Powell Industries, Inc.   VNT Vontier Corp.   DCI Donaldson Co., Inc.   LECO Lincoln Electric Holdings, Inc.   CAT Caterpillar, Inc.   TEX Terex Corp.   DE Deere & Co.   AGCO AGCO Corp.   WNC Wabash National Corp.   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