World Blog by humble servant.Were the Big Money and Sharp as Razors see value and are early Participants. I Like the Pharmaceutical value play
Consumer Discretionary is in the middle of valuation rankings
This has had an outsized impact on the Consumer Discretionary sector, as well. Since 2009, internet sales have grown from being 6.3% of the sector to over 20%. In terms of the market cap representation within the sector, 11 of the largest companies constituted 50% of the sector in 2009, with the largest single company (McDonalds) representing 7.6%. Now, just the top four companies comprise 50%, with the largest company (Amazon) coming in at nearly 30% of the weight. As we see a concentration of a sector like this, it leaves open the possibility that company-specific factors have an outsized influence on the overall sector relative performance and fundamentals. That’s something that we have to consider when assessing an overall sector.
While revenue growth in the sector is being driven in large part by the internet sub-industry and may be softening, return on equity (ROE) is more evenly dispersed across the sector and is currently among the highest of all of the sectors. This has historically been a long-term tailwind for the various sectors.
Despite concerns about overconcentration in the sector and a weakening sales outlook, we judge the fundamentals to be neutral for the consumer discretionary sector, as some of the core underpinnings of the fundamentals remain supportive.
Valuations: Neutral
We consider valuations for the various sectors by viewing the distance of multiple indicators from their historic mean relative to the S&P 500 Index. We do this for two reasons:
There is not any one valuation metric that best characterizes true valuations, so we take a diversified approach by assessing six different indicators related to historical and expected earnings, the cash flow statement, and the balance sheet.
We want to common-size the metrics for each sector by measuring the standard deviation from each sector’s mean for each indicator. Some sectors have a naturally low price-earnings ratio or high dividend yield, for example, so we can compare apples to apples by comparing each to its own history.Bottom line, valuations for the consumer discretionary sector are neutral.
This has had an outsized impact on the Consumer Discretionary sector, as well. Since 2009, internet sales have grown from being 6.3% of the sector to over 20%. In terms of the market cap representation within the sector, 11 of the largest companies constituted 50% of the sector in 2009, with the largest single company (McDonalds) representing 7.6%. Now, just the top four companies comprise 50%, with the largest company (Amazon) coming in at nearly 30% of the weight. As we see a concentration of a sector like this, it leaves open the possibility that company-specific factors have an outsized influence on the overall sector relative performance and fundamentals. That’s something that we have to consider when assessing an overall sector.While revenue growth in the sector is being driven in large part by the internet sub-industry and may be softening, return on equity (ROE) is more evenly dispersed across the sector and is currently among the highest of all of the sectors. This has historically been a long-term tailwind for the various sectors.
Despite concerns about overconcentration in the sector and a weakening sales outlook, we judge the fundamentals to be neutral for the consumer discretionary sector, as some of the core underpinnings of the fundamentals remain supportive.
Valuations: Neutral
We consider valuations for the various sectors by viewing the distance of multiple indicators from their historic mean relative to the S&P 500 Index. We do this for two reasons:
There is not any one valuation metric that best characterizes true valuations, so we take a diversified approach by assessing six different indicators related to historical and expected earnings, the cash flow statement, and the balance sheet.
We want to common-size the metrics for each sector by measuring the standard deviation from each sector’s mean for each indicator. Some sectors have a naturally low price-earnings ratio or high dividend yield, for example, so we can compare apples to apples by comparing each to its own history.Bottom line, valuations for the consumer discretionary sector are neutral.
Our overall sector views: Overweight Health Care, underweight Communication Services
We are currently maintaining a neutral view on most of the sectors, as our research has painted a mixed landscape with little conviction for many areas of the U.S. equity market. The exceptions are an overweight to Health Care and an underweight to Communication Services.
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