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Wednesday, January 30, 2013
Thursday, January 24, 2013
Building Materials and Homebuilding Industries overvaluation and the role of the ETFs
A short article in this week's Barron's by Vito Racanelli (Jan 25 p. M5) prompted another look at two of the most expensive industries in our year end valuation.
Building Materials and Homebuilding were overvalued on average by 57% and 59% respectively and so far this month, they have outperformed the market.
D R Horton (DHR) is a good example of the extent to which the valuations are stretched beyond anything that their past history would support.
DHR's estimate is $0.95 for this year but its normalized earnings are $1.29, an RoE of 14%. (Expressed as MPEPS, it is shown on the right hand side of this graph.)
Using its history of relative valuation, DHR would need to earn a normalized RoE (not peak!) of 31% or $2.82 (IEPS) a share and have an annual growth rate of 32%. This has no precedence in the companies history except for a brief period in the early nineties when the company likely was very different than it is today. The consensus estimates for 2014 is $1.35 which doesn't come close to what is needed.
This graph shows the calculated price range vs the actual High, Low and Close.
The performance test for this analysis is good. The median return of the most expensive years is -7% pa relative to the S&P 500 while the median return for the most undervalued years is +35%.
Other stocks in this group, like LEN and KBH to name but two, are very similar to this picture.
One possible explanation that caught my eye in the Barron's piece, was the role played by ETF's which attract investment dollars to industries and sectors, presumably without the benefit of any valuation analysis.
This graph shows the dollar volume and its six month moving average of the purchases of the S&P Homebuilding ETF.
There was a surge in demand for this ETF starting in September of 2011. It is very likely that that is part of the reason for this extraordinary opportunity in overvaluation.
Building Materials and Homebuilding were overvalued on average by 57% and 59% respectively and so far this month, they have outperformed the market.
D R Horton (DHR) is a good example of the extent to which the valuations are stretched beyond anything that their past history would support.
Analysis of DHR
Using its history of relative valuation, DHR would need to earn a normalized RoE (not peak!) of 31% or $2.82 (IEPS) a share and have an annual growth rate of 32%. This has no precedence in the companies history except for a brief period in the early nineties when the company likely was very different than it is today. The consensus estimates for 2014 is $1.35 which doesn't come close to what is needed.
The performance test for this analysis is good. The median return of the most expensive years is -7% pa relative to the S&P 500 while the median return for the most undervalued years is +35%.
Other stocks in this group, like LEN and KBH to name but two, are very similar to this picture.
One possible explanation that caught my eye in the Barron's piece, was the role played by ETF's which attract investment dollars to industries and sectors, presumably without the benefit of any valuation analysis.
This graph shows the dollar volume and its six month moving average of the purchases of the S&P Homebuilding ETF.
There was a surge in demand for this ETF starting in September of 2011. It is very likely that that is part of the reason for this extraordinary opportunity in overvaluation.
Tuesday, January 22, 2013
Monday, January 21, 2013
Changes in the 12/31 Screens for value (UV and OV)
The undervalued (UV) and overvalued Screens of 12/31 showed a turnover of 4 to 6 stocks in each during the month of December. The changes were almost all driven by price.
Performance update and current screens for value
Performance
After 9 months of under performance, we may have reached a turning point.
The first graph shows the updated Undervalued (Long) screen's relative index compared to the overvalued (Short)*. They are shown relative to the CEV universe as it has outperformed the S&P by 24% over the period.
Since Sept '04, the annualized relative return has averaged +3.3 and -4.4% respectively for a spread of 7.6% (significantly more than the spread between the 25th and 75th percentile of US equity fund performance for comparable periods).
The last 2 months have shown a significant improvement in the Long performance. The same can be said for the Short lists which have leveled off.
This table shows the contribution by Sector and Industry to the December results alone.
A look at the current valuations below will provide a basis for deciding whether this is a significant turning point or not.
Absolute performance
In terms of absolute performance, the Long index gained 9.2% pa over the period vs 1.1% for the Short. $100 invested at the outset is now worth $207 vs $110. All returns exclude income.
* The undervalued are defined as 4th quartile in Valuation Return (VR) and 4th quartile in the EST/MPEPS ratio i.e where the estimate is higher than the normalized earnings used for the valuation. The overvalue are the opposite i.e. quartiles 1 & 1.
Current Valuations
This table summarizes the investment characteristics of the current (12/31/12) Long and Short lists. The undervalued are dominated by Industrial and Technology stocks. Both Sectors performed well in December. The biggest weighting in the overvalued list is in Consumer Cyclical stocks which also outperformed the market.
Other investment characteristics include:
1) the Undervalued have a significantly higher Reinvestment Return (RR- 13.9 vs 9.9),
2) Paybacks are much lower for the Undervalued and
3) the Market Cap is more than 4x the average of the Overvalued.
The stocks in the two lists are:
Tuesday, January 15, 2013
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