PBJ: Consumer Staples Dashboard For September (NYSEARCA:PBJ)

This monthly article series includes a dashboard with aggregate industry metrics in consumer staples. It is also a review of sector ETFs like The Consumer Staples Select Sector SPDR® Fund ETF (XLP) and Invesco Food & Beverage ETF (NYSEARCA:PBJ).

Shortcut

The next two paragraphs in italics 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 a 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 into 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). In 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 defined above.

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Value And Quality chart

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

Evolution since last month

The value score has deteriorated across all industries, partly due to price action.

Momentum

The next chart plots momentum scores based on median returns.

Interpretation

The consumer staples sector as a whole is close to its 11-year averages in valuation, based on my monthly S&P 500 dashboard. The most attractive industry regarding value and quality scores is household products, then come beverages. Personal care and food are slightly overvalued, by about 7% relative to their historical baseline. Retailing and tobacco are almost at their valuation baseline, but the latter has a terrible quality score.

PBJ: a consumer staples ETF focused on two industries

Invesco Food & Beverage ETF was launched on 6/23/2005 and tracks the Dynamic Food & Beverage Intellidex℠ Index. It has 32 holdings, a 30-day SEC yield of 1.32% and a total expense ratio of 0.57%, much pricier than XLP (0.09%).

As described by Invesco, the underlying index

“is designed to provide capital appreciation by thoroughly evaluating companies based on various investment merit criteria, including price momentum, earnings momentum, quality, management action, and value.“

PBJ is mainly focused on the food and beverage industries, but according to the prospectus, it may include retailing, distribution, and consumer services companies providing food and beverage products. The portfolio turnover rate is quite high: 118% in the most recent fiscal year (vs. 17% for XLP).

Since inception, PBJ has underperformed XLP by 171% in total return (about 2% annualized).

PBJ has lagged the sector benchmark by almost 14% in 2024 to date:

The portfolio is quite concentrated: the top 10 holdings, listed in the next table, represent 46.3% of asset value.

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In summary, PBJ implements a strategy focused on food and beverage producers and distributors, and based on fundamental and momentum criteria. The fund has underperformed the sector benchmark since its inception in 2005, especially this year. Moreover, XLP is more liquid and has a cheaper fee. Both funds are quite concentrated in the top holdings. Investors who want to limit the risks related to individual companies may prefer the Invesco S&P 500® Equal Weight Consumer Staples ETF (RSPS).

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 0.044 (or price/earnings below 22.73) 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 stocks below are part of the list sent to subscribers a few weeks ago.

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It is a rotational model with a statistical bias toward excess returns in the long term, not the result of an analysis of each stock.