FDIS: Consumer Discretionary Dashboard For September

This monthly article series shows a dashboard with aggregate subsector metrics in Consumer Discretionary. It is also a top-down analysis of sector ETFs like the Consumer Discretionary Select Sector SPDR ETF (XLY) and the Fidelity MSCI Consumer Discretionary Index ETF (NYSEARCA:NYSEARCA:FDIS), 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 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 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 retailing in the table below is the 11-year average of the median Earnings Yield in retail 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. A floor of -100 is set for VS and QS when the calculation goes below this value. It may happen when metrics in a subsector are very bad.

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
Auto + Components	-48.85	-11.70	0.0494	0.8805	0.0067	13.36	23.72	0.0606	1.6332	0.0372	19.33	22.06	-7.23%	-12.51%
Durables + Apparel	26.93	11.26	0.0783	0.7459	0.0389	26.82	35.63	0.0511	0.6988	0.0322	18.26	47.12	-8.73%	-21.20%
Retailing	-26.52	15.65	0.0481	0.6339	0.0208	33.51	34.59	0.0498	0.8855	0.0398	24.62	36.33	-9.72%	-17.57%
Services	-18.46	-4.76	0.0189	0.3840	0.0202	14.13	32.62	0.0338	0.4131	0.0211	14.27	35.67	-5.21%	-11.73%

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Value and Quality chart

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

Evolution since last month

The value score has improved in all subsectors except retailing.

Momentum

The next chart plots momentum data.

Interpretation

The most attractive industry in consumer cyclicals is durables and apparel. It is undervalued by about 27% relative to 11-year averages, and quality is above the baseline. It includes household equipment, leisure products, textile, apparel and luxury goods. The services subsector is overvalued by about 18% and it is close below the quality baseline. It includes hotels, restaurants, leisure and diversified services, and its metrics have improved a lot since the end of pandemic-related lockdowns. Retailing is overvalued by about 26% relative to the historical baseline, which may be partly justified by a good quality score. Auto and components are the worst ranked in both value and quality scores.

FDIS fast facts

The Fidelity MSCI Consumer Discretionary Index ETF (FDIS) has been tracking the MSCI USA IMI Consumer Discretionary 25/50 Index since 10/21/2013. It has a total expense ratio of 0.08%, which is lower than XLY (0.10%).

The fund has 330 holdings as of writing. The next table shows the top 10 names with basic ratios and dividend yields. Their aggregate weight is 62.9%, with 39.46% in the top two companies. Amazon and Tesla represent 24.41% and 15.05% of the fund’s asset value.

Ticker	Name	Weight	EPS growth %TTM	P/E TTM	P/E fwd	Yield%
AMZN	Amazon.com, Inc.	24.41%	-61.05	113.50	1782.61	0
TSLA	Tesla, Inc.	15.05%	332.56	105.56	73.10	0
HD	The Home Depot, Inc.	6.51%	14.47	17.08	16.77	2.73
MCD	McDonald’s Corp.	4.07%	-11.61	31.34	25.80	2.17
NKE	Nike, Inc.	2.95%	5.39	28.17	28.44	1.15
LOW	Lowe’s Cos., Inc.	2.83%	30.78	15.26	14.32	2.17
SBUX	Starbucks Corp.	2.11%	48.92	24.70	30.59	2.23
BKNG	Booking Holdings, Inc.	1.67%	272.91	51.21	19.76	0
TGT	Target Corp.	1.67%	-29.85	18.88	20.39	2.60
TJX	The TJX Cos., Inc.	1.62%	35.97	23.03	20.84	1.83

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Ratios: Portfolio123

FDIS has beaten XLY by a short margin of 55 bps in annualized return since inception. It is a bit more volatile, and as a consequence has a slightly lower Sharpe ratio (risk-adjusted performance).

	Total Return	Annual. Return	Drawdown	Sharpe	Volatility
FDIS	190.98%	12.78%	-37.44%	0.66	19.45%
XLY	178.63%	12.23%	-36.53%	0.68	18.42%

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Data calculated with Portfolio123

In summary, FDIS is a good product with cheap management fees for investors seeking capital-weighted exposure in consumer cyclicals. It holds 300+ stocks including large, mid- and small caps, whereas XLY has only 60 holdings in large companies. It has outperformed XLY by a short margin since 2013. FDIS looks a good choice for long-term investors, but XLY liquidity makes it a better instrument for tactical allocation and trading. Investors who are concerned by the weights of Amazon and Tesla may prefer the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD).

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 retail company with an Earnings Yield above 0.0481 (or price/earnings below 20.79) 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.

GDEN	Golden Entertainment, Inc.
PLAY	Dave & Buster’s Entertainment, Inc.
MGM	MGM Resorts International
WSM	Williams-Sonoma, Inc.
MUSA	Murphy USA, Inc.
AN	AutoNation, Inc.
PLCE	The Children’s Place, Inc.
JWN	Nordstrom, Inc.
SBH	Sally Beauty Holdings, Inc.
M	Macy’s, 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.