VDC: Consumer Staples Dashboard For October (NYSEARCA:VDC)

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) and the Vanguard Consumer Staples ETF (NYSEARCA:VDC), 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.

	VS	QS	EY	SY	FY	ROE	GM	EYh	SYh	FYh	ROEh	GMh	RetM	RetY
Staple/Food Retail	-24.35	-4.55	0.0384	1.8785	0.0126	17.55	19.08	0.0430	1.9212	0.0316	16.64	22.33	-7.76%	-3.08%
Food	-7.82	10.56	0.0497	0.5809	0.0201	20.95	28.34	0.0460	0.6745	0.0244	15.37	33.41	0.92%	1.91%
Beverage	-8.67	-23.28	0.0358	0.2924	0.0118	18.72	40.75	0.0368	0.2676	0.0175	24.45	53.01	-4.54%	1.79%
Household prod.	14.92	0.31	0.0828	1.3985	0.0006	18.25	38.53	0.0449	0.8807	0.0386	17.16	40.88	-8.53%	-42.05%
Personal care	-4.69	8.73	0.0421	0.4162	0.0171	22.11	63.17	0.0384	0.4563	0.0201	21.41	55.31	-4.69%	-11.28%
Tobacco	46.16	100*	0.0716	0.7126	0.0243	207.17	50.86	0.0589	0.4666	0.0148	34.49	52.60	-2.94%	-1.06%

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*capped for convenience

Value And Quality chart

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

Evolution since last month

Valuation has improved in all industries except food. Staple/food retail has deteriorated in quality.

Momentum

The next chart plots momentum data.

Interpretation

Tobacco has been the best-ranked industry in both value and quality scores for months. A note of caution though: there are only five tobacco companies in this universe, so statistics may be less reliable than in other subsectors. Household products are undervalued by about 15% relative to 11-year averages, and they are very close to the historical baseline in quality. Personal care, food and beverage are slightly overvalued. Beverage is below the quality baseline. Staple/food retail is the most overvalued consumer defensive industry.

VDC fast facts

The Vanguard Consumer Staples ETF (VDC) has been following the MSCI USA IMI Consumer Staples 25/50 Index since 01/26/2004. It has a distribution yield of 2.62% and a total expense ratio of 0.10%, the same as XLP.

As of writing, the fund has 100 holdings. The next table shows the top 10 with their growth, price/earnings ratios and dividend yields. Their aggregate weight is 61%. The fund is quite exposed to risks related to the top five names: each of them weighs between 7.3% and 12.2% of asset value.

Ticker	Name	Weight%	EPS ttm growth%	P/E ttm	P/E fwd	Yield%
PG	Procter & Gamble Co.	12.15%	5.61	21.95	21.88	2.87
KO	The Coca-Cola Co.	8.94%	17.92	25.31	22.66	3.16
PEP	PepsiCo, Inc.	8.66%	19.20	24.71	25.50	2.66
COST	Costco Wholesale Corp.	8.01%	16.61	35.33	31.86	0.78
WMT	Walmart, Inc.	7.31%	41.18	26.23	22.45	1.71
PM	Philip Morris International, Inc.	4.27%	2.58	14.69	15.34	5.94
MDLZ	Mondelez International, Inc.	3.45%	-8.61	20.84	19.92	2.68
MO	Altria Group, Inc.	3.32%	-60.24	45.84	9.22	8.43
CL	Colgate-Palmolive Co.	2.57%	-27.76	31.29	23.98	2.61
EL	The Estee Lauder Companies	2.28%	-16.20	32.61	28.60	1.13

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Ratios: Portfolio123

VDC has slightly outperformed XLP since inception, but the difference in annualized total return is insignificant (30 bps). They also have a similar risk-adjusted performance (Sharpe ratio in the table below).

	Total Return	Annual Return	Max Drawdown	Sharpe	StdDev
VDC	429.56%	9.32%	-35.92%	0.71	11.39%
XLP	403.50%	9.02%	-33.45%	0.7	11.15%

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In summary, VDC is an ETF with cheap fees for investors seeking capital-weighted exposure in consumer staples. It holds much more stocks than XLP (currently 100 vs. 34), but this has not made a significant difference in past performance. For long-term investors, XLP and VDC are equivalents. However, liquidity makes XLP a better choice for tactical allocation and trading. The fund is significantly exposed to risks related to the top five holdings, which weigh 45% together. Investors who are concerned by this concentration may prefer 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 0.0497 (or price/earnings below 20.12 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.

USNA	USANA Health Sciences, Inc.
KR	The Kroger Co.
COKE	Coca-Cola Consolidated, Inc.
TAP	Molson Coors Beverage Co.
EPC	Edgewell Personal Care Co.
WBA	Walgreens Boots Alliance, Inc.
NUS	Nu Skin Enterprises, Inc.
PPC	Pilgrim’s Pride Corp.
TSN	Tyson Foods, Inc.
POST	Post Holdings, Inc.

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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.