Sector Fundamental Analysis (Part 1 of 2)

Something I like to do twice a year is have a fundamentals showdown between the 10 top holdings in each sector group to see which stocks are relatively cheap compared to their peers. Although I use price as my primary investment criteria, I feel it is valuable to have an understanding of relative valuations, as it unearths potential opportunities that one would otherwise be ignorant to. Most of the time I don't particularly care what a company is doing financially so long as the trend is up and Wall Street's impression of the company is positive. But when you can use the fundamental valuation to reveal even more potential upside, it can be incredibly useful.

How I like to use relative valuation is when I have two strongly performing stocks (price suggests gains ahead) and I am trying to choose between one over the other. If price is essentially saying the same thing but one company is reasonably cheaper financially, I use the valuation to act as a tie breaker. That way I am not only buying the strongest performing stocks, but also the relatively cheapest.

Each Sector group that we follow within the Blog Portfolio is made up of mostly 10 companies (there are many more than 10 holdings in each sector, but the top 10 holdings are what move the needle). These stocks are suppose to represent the 10 strongest and best positioned companies in each industry; right off the bat we are drawing from a very strong pool. We then compare them individually against each other in terms of relative valuation. I calculate a "valuation metric" that I adapted using James P. O'Shaughnessy's book "What Works on Wall Street" as my statistical backing and valuation model. We compare the 6 classic valuation ratios that O'Shaughnessy uses in his analysis and I added PEG to consider growth into the metric:

Price/Earnings, Price/Book, Price/Sales, Price/Cash Flow, EBITDA/EV, PEG, and Shareholder Yield.

All of this information can be figured from a company's yearly financial statements and most business websites offer many price ratios for quick reference. If you would like to get the individual fundamental breakdowns for each stock and sector shoot me a comment with an email and I will just send you my work.

The "valuation metric" I calculate is very simple. Each stock gets a 1-10 rank per ratio category depending on how it compares to its peers. A 10 is given for the cheapest valuation in the category and a 1 is given for the most expensive valuation in the category. We do this for each price ratio and create a composite score for each stock. That then gives a our ranking from relative cheapest to most expensive in the group. Here are the results for each sector. I have also added the current 1-year Relative Strength (RS) within the sector.

XLF- Financials

	Fundamental				RS 1-YR
BAC	43				BAC
C	40				C
JPM	38				GS
MET	34				AIG
AIG	33				MET
GS	25				JPM
WFC	24				XLF
USB	22				WFC
AXP	20				AXP
					USB

XLY- Discretionary

Fundamental					RS 1-YR
CMCSA	58				F
FOXA	57				SBUX
TWX	54				TWX
F	50				FOXA
HD	38				HD
DIS	38				NKE
MCD	34				XLY
NKE	27				CMCSA
SBUX	17				DIS
AMZN	13				AMZN
					MCD

XLK- Technology

	Fundamental				RS 1-YR
INTC	55				GOOG
AAPL	49				CSCO
IBM	43				MSFT
T	43				VZ
ORCL	43				QCOM
CSCO	39				XLK
VZ	39				ORCL
QCOM	33				IBM
MSFT	29				T
GOOG	15				INTC
					AAPL

XLI- Industrials

	Fundamental				RS 1-YR
CAT	58				BA
GE	50				HON
UNP	49				UNP
CMI	47				UTX
BA	47				CMI
UTX	35				MMM
MMM	31				XLI
EMR	29				EMR
HON	23				UPS
UPS	17				GE
					CAT

XLB- Materials

	Fundamental				RS 1-YR
FCX	58				PPG
LYB	58				LYB
DOW	53				IP
IP	49				ECL
NUE	34				DOW
MON	31				APD
APD	31				NUE
DD	30				XLB
PPG	28				DD
ECL	24				MON
					FCX

XLE- Energy

	Fundamental				RS 1-YR
CVX	55				EOG
COP	54				HAL
APA	49				APC
XOM	46				COP
OXY	38				XLE
APC	38				SLB
HAL	34				CVX
SLB	30				ENB
EOG	23				OXY
ENB	19				XOM
					APA

XLP- Staples

	Fundamental				RS 1-YR
CVS	63				CVS
WMT	60				HAIN*
PM	46				COST
MO	43				PG
PEP	38				XLP
COST	35				CL
PG	31				PEP
HAIN	25				WMT
KO	22				MO
CL	22				KO
					PM

XLV- Healthcare

	Fundamental				RS 1-YR
UNH	55				GILD
PFE	49				AMGN
ESRX	47				UNH
MDT	44				BMY
ABT	40				JNJ
MRK	40				MDT
JNJ	36				XLV
AMGN	32				PFE
BMY	22				MRK
GILD	20				ABT*
					ESRX

XLU- Utilities

	Fundamental				RS 1-YR
AEP	54				SEP
PCG	54				NEE
EXC	51				D
PPL	47				PPL
ED	41				XLU
DUK	35				DUK
SO	31				AEP
SRE	29				PCG
NEE	22				ED
D	21				SO
					EXC

Okay, so there is the hard data. In our Part 2 post I will discuss interesting notes about each group and some general thoughts on reading between the lines to extract maximum potential. 

*Note: HAIN and ABT are not actually members of the XLP and XLV respectively. HAIN is a long time favorite of mine and it is a consumer products company, I just feel its a little more interesting to follow than the smallest of the top ten holdings in the XLP, Mondelez. They produce similar products except HAIN is an organic foods producer which I feel is underrepresented in the sector, but I also like its prospects more than most in the group. ABT in a recent company spin off, separated itself into two companies, Abbott Labs and AbbVie the pharma side of the business; AbbVie has replaced ABT officially in the XLV. I prefer the original company for my research as that was the stock in the XLV for years prior. These are just funny quirks that I have thrown into my analysis, so omit them if you see fit to.