Utilities Select Sector SPDR ETF (XLU): Dashboard for July

This series of monthly articles features a dashboard with overall industry metrics in utilities. It is also a top-down analysis of sector ETFs like the SPDR Utilities Select Sector ETF (NYSEARCA:XLU), 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 metrics. If you are used to these series or if you are short on time, you can skip them and go to the leaderboards.

Basic Metrics

I calculate the median value of five fundamental ratios for each industry: return on earnings (“EY”), return on sales (“SY”), return on free cash flow (“FY”), return on equity (“ROE “), gross margin (“GM”). The reference universe includes large companies in the US stock market. The five basic measures are calculated over the last 12 months. For everyone, the higher, the better. EY, SY and FY are the medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price/something ratios, which are unusable or unavailable when the “something” is close to zero or negative (e.g. companies with negative earnings). I also look at two momentum indicators for each group: median monthly return (RetM) and median annual return (RetY).

I prefer medians to means because a median divides a set into a good half and a bad half. A capital-weighted average is skewed by extreme values ​​and larger 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 denoted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as averages over a retrospective period of 11 years. For example, the value of EYh for hardware in the table below is the 11-year average of median earnings performance 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). Exercise is flagged for consistency with other sector dashboards, but ignored in utilities‘score to avoid some inconsistencies. In the Similarly, the Quality Score (“QS”) is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

Scores are in percentage points. VS can be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation should be taken with caution: the baseline is an arbitrary reference and not an assumed fair value. The formula assumes that the of them Evaluation reports are of equal importance.

Current data

The following table shows last week’s closing metrics and scores. The columns represent all the data named and defined above.

	VERSUS	QS	EY	SY	AF	DEER	GM	EYh	SYh	FYh	ROeh	GMH	RetM	RetY
Gas	-15.75	-1.35	0.0461	0.4728	-0.0891	8.84	38.36	0.0482	0.6489	-0.0578	9.44	36.99	2.63%	12.93%
Water	-24.90	6.07	0.0341	0.1596	-0.0389	10.75	55.21	0.0381	0.2629	-0.0323	9.56	55.40	10.32%	-6.40%
Electricity	-25h30	-0.08	0.0447	0.3524	-0.0591	8.96	41.88	0.0526	0.5470	-0.0435	9.85	38.45	3.22%	4.24%

Value and Quality Chart

The following chart plots the value and quality scores by industry. The higher, the better.

Evolution since last month

The value score went up a bit for gas and electricity, down a bit for water. These movements are not very significant.

Momentum

The following chart plots momentum data.

Interpretation

Utilities is one of the two most overvalued sectors, along with industrials (S&P 500 scorecard here). The sector posted the second best momentum over 1 year behind energy. Utilities industries are 15-25% overvalued relative to 11-year averages. The quality is above the historical benchmark in water utilities, but not high enough to justify a 25% overvaluation. Electricity and gas are close to baseline quality. In terms of momentum, water is the weakest sub-sector in a rolling year and the strongest in a rolling month.

XLU Highlights

The Utilities Select Sector SPDR Fund (XLU) has tracked the Utilities Select Sector Index since 16/12/1998. It has 28 holdings, an expense ratio of 0.12% and a payout yield of 2.9%.

The following table shows the top 10 stocks with basis ratios and dividend yields. Their overall weight is 63% and the largest weighs 15.7% (NextEra Energy Inc.). The risk associated with the four main holdings is quite high (each of these positions represents more than 6.5% of the portfolio).

Teleprinter	Last name	Lester%	EPS growth %ttm	P/E ttm	P/E front	Yield%
BORN	NextEra Energy Inc.	15.67	-65.14	105.24	27.12	2.19
duke	Duke Energy Corp.	8.38	173.19	22.12	7:33 p.m.	3.81
SO	Southern Company	7.79	-32.29	33.36	20.17	3.79
D	Dominion Energy Inc.	6.51	241.75	21.84	18.94	3.42
AEP	American Electric Power Co.	4.96	13.77	17.92	6:70 p.m.	3.34
ERS	sempra	4.82	-75.95	47.24	5:55 p.m.	3.07
EXC	Exelon Corp.	4.39	136.41	16.54	7:36 p.m.	3.09
XEL	Xcel Energy Inc.	3.86	2.96	22.96	9:60 p.m.	2.84
OF	Consolidated Edison Inc.	3.35	27.65	9:20 p.m.	8:33 p.m.	3.45
CME	WEC Energy Group Inc.	3.22	7.88	23.04	22.62	2.95

Ratios by portfolio123.

Investors who don’t like exposure to big names may prefer the Invesco S&P 500 Equal Weight Utilities ETF (RYU).

Since January 1999, XLU has beaten the S&P 500 (SPY) in total return (411% vs. 374%). However, the difference in annualized return is around 40 basis points (7.2% versus 6.8%). XLU has outperformed the broad index by 16.5 percentage points over the past 12 months:

Dashboard list

I use the first table to calculate the value and quality scores. It can also be used in a stock selection process to check the standing of companies against their peers. For example, the EY column tells us that a power company with an earnings yield greater than 0.0447 (or a price/earnings less than 22.37 is in the better half of the industry with respect to Quantitative Risk & Value subscribers are sent a dashboard list each month, with the most profitable companies ranking in the top half among their peers on all three valuation metrics at the same time. below was sent to subscribers several weeks ago based on data available at that time.

NRG	NRG Energy Inc
RS	Spire Inc.
BKH	Black Hills Society
HE	Hawaiian Electric Industries Inc.
EF	First Energy Corp.
CWT	California Water Utility Group
EXC	Exelon Corporation
PNO	Pinnacle West Capital Corp
NOC	Center Point Energy Inc.
NMP	PNM Resources Inc.

This is a rolling list with a statistical bias toward long-term excess returns, not the result of an analysis of each stock.