ISMS 7: Financials, Cons. Disc., and Utilities Sectors Look Most Interesting
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In this presentation, I will introduce you to our MSCI Sectors and their attractiveness
Click here to get the PDF with all charts and graphs
What do you think: Which of the global sectors is most attractive?
We use GICS sector classification
- GICS The Global Industry Classification Standard (GICS®) is an industry classification system developed by Standard & Poor’s Financial Services LLC (S&P) and MSCI in 1999
- GICS works well for the global financial community
MSCI separates stocks into 11 different sectors
- Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Communication Services, Utilities, and Real Estate
Then 25 Industry groups
- Some sectors such as Industrials have three Industry groups as follows:
- Capital Goods
- Commercial & Professional Services
- Transportation
There are 74 industries
- Within Transportation Industry Group there are five main Industries
- 1) Air Freight & Logistics, 2) Passenger Airlines, 3) Marine Transportation, 4) Ground Transportation, and 5) Transportation Infrastructure
There are 163 Sub-Industries
- Finally, within the Industrials Sector, the Transportation Industry group, the Transportation Infrastructure Industry, are 3 Sub-Industries
- 1) Airport Services, 2) Highways & Railtracks, and 3) Marine Ports & Services
GICS sectors include 1,508 Developed Market companies, total market cap is about US$53trn
- The largest sector is Info. Tech. at US$11trn market cap and consists of 183 companies
- The smallest is Real Estate with a market cap of US$1.5trn and 96 companies
What is your investment framework?
- Our investment strategies for ETFs and stocks come from our FVMR framework
- We backtest and optimize the strategy for the factors that have worked best in each market
We do all our research in-house
- We don’t rely on other people’s research
- We might of course get ideas from others, but we then test those ideas in our FVMR framework
The benefit of an investment framework is that it forces discipline when emotions run high
- Emotions from wild market events can cause you to make rash and costly decisions
- To avoid this, stick to a framework
- Our framework relies on data & structure, not just a feeling or opinion
Management
- Is responsible for producing earnings
Investors
- Set the price the company trades at
There are 4 Elements to our FVMR framework
- Fundamentals: Strong profitability shows a company is managed well.
- We prefer high or rising profitability.
- Valuation: Shows how the market perceives the stock.
- We prefer good fundamentals at relatively cheap valuations.
- Momentum: We try to avoid “value traps” by looking for positive price and earnings momentum.
- At times, low momentum signals an out-of-favor opportunity.
- Risk: We prefer low business and price risk.
- Not every stock is going to fly; some just provide stable returns and strong dividends.
Fundamentals
Info. Tech has a 23% ROE; Health Care, Cons. Staples, and Energy are each earning 20% ROE
- 15% average is higher than the long-term average of 12%
Info. Tech. has a strong 16% net margin
- The current market average net margin of 10% is still much higher than the long-term average of about 6%
- 5 sectors have 7-8% net margin
What you have learned
- Even after difficult times, Info. Tech. still has a high 23% ROE and a strong 16% net margin
- Health Care, Cons. Staples, and Energy are each earning strong 20% ROE
- Average ROE is 15%, higher than 12% LT average
- The current average net margin of 10% is much higher than the LT average of about 6%
- Info. Tech and Health Care are most profitable
Valuation
24x PE for Info Tech. is highest; Financials at 11x and Energy at 8x are the cheapest
- Financials look interesting at this level
- Generally, you buy cyclical energy and materials sectors when PE is high which is when earnings are at the bottom of the cycle
Info. Tech. is crazy expensive at 5.4x PB, Cons. Staples and Health Care are also expensive
- Financials look attractive
Even after adjusting for cash, Info. Tech companies are fixed asset light
Expensive Info. Tech., Health Care, and Cons. Staples; cheap Comm. Services and Financials
Five sectors are yielding more than 3%, signaling they are potentially cheap
- Financials look interesting
Financials are most attractive, Info. Tech. and Real Estate least
What you have learned
- 24x PE for Info Tech. is highest; Financials at 11x and Energy at 8x are the cheapest
- Financials look interesting at this level
- Buy cyclical energy and materials when PE is high
- Info. Tech. is crazy expensive at 5.4x PB, Cons. Staples and Health Care are also expensive
- Five sectors are yielding more than 3%, signaling some are potentially cheap
Momentum
2023 revenue growth expectations are a low 2%, highest is Cons. Disc., lowest is Energy
2023 consensus earnings growth flat, up at Financials, Cons. Disc., and Utilities
Best 6-mth price momentum at defensive sectors: Health Care, Cons. Staples, and Utilities
- Real Estate has been hit hard from Fed rate hikes
Info. Tech., Energy, and Materials are best 3-year performers, Real Estate worst
What you have learned
- Low 2023 revenue growth expected highest growth at Cons. Disc., is Energy
- 2023 consensus earnings growth flat, up at Financials, Cons. Disc., and Utilities
- Best 6-mth price momentum at defensive sectors: Health Care, Cons. Staples, and Utilities
- Info. Tech., Energy, and Materials are best 3-year performers, Real Estate worst
Financials, Cons. Disc., and Utilities look interesting
- Financials – Cheap and good momentum
- Cons. Disc. – Strong earnings momentum
- Utilities – Weak fundamentals, but cheap and good earnings and price momo
Info. Tech, Health Care, and Cons. Stapes strong, but expensive
- Info. Tech. – Strong fundamentals but expensive
- Health Care – Strong fundamentals and price momo, but expensive
- Cons. Staples – Strong fundamentals and price momo, but expensive
Energy and Materials appear cheap…but
- For cyclicals we usually buy when expensive
Key points and the bottom line
- Financials, Cons. Disc., and Utilities look interesting
- Info. Tech, Health Care, and Cons. Stapes strong, but expensive
- Energy and Materials appear cheap we usually buy them when expensive