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Which S&P 500 Sectors to Consider Amid an Uncertain Global Economy

Jan 23, 2019

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  • Today we analyze sectors in the S&P 500 Index to identify which sectors look attractive. In the tables below, we outline forward and trailing trading multiples, analyst consensus growth estimates, and an ROE Dupont breakdown of each sector in the S&P 500 Index.  
     
  • Utilities stocks in the S&P 500 appear to be the least attractive investment opportunity among S&P 500 sectors, as indicated by their low aggregate EPS growth forecasts and somewhat expensive trading multiples. On a forward-looking basis, utilities stocks maintain the third-most expensive P/E multiple among sectors in the S&P 500. Additionally, analysts forecast utilities stocks to produce the slowest mid-term bottom-line EPS growth among sectors in the S&P 500, projecting 1-year EPS growth of just 1.69% and a 3-year cumulative average growth rate of just 4.03%.

S&P 500 Sector Index Multiples, Yields, and Projected EPS Growth

  Fwd 12M P/E Ratio T12M P/E Ratio T12M EBIT/EV T12M FCF Yield FWD 12M EPS Growth (%) 3 Year Fwd EPS CAGR
S&P 500 CONS DISCRET INDEX 18.83x 22.31x 4.78% 4.15% 18.47% 13.91%
S&P 500 CONS STAPLES INDEX 17.31x 18.62x 5.76% 3.88% 7.55% 6.27%
S&P 500 INFO TECH INDEX 16.03x 18.48x 6.41% 5.73% 15.31% 10.89%
S&P 500 FINANCIALS INDEX 11.32x 13.01x 8.63% 8.14% 14.95% 11.77%
S&P 500 HEALTH CARE INDEX 15.37x 20.33x 4.72% 4.49% 32.30% 16.62%
S&P 500 INDUSTRIALS INDEX 14.47x 16.44x 5.00% 3.28% 13.57% 12.28%
S&P 500 ENERGY INDEX 16.59x 17.49x 5.50% 3.22% 5.44% 10.31%
S&P 500 UTILITIES INDEX 17.13x 17.42x 4.27% -1.51% 1.69% 4.03%
S&P 500 MATERIALS INDEX 14.35x 15.26x 5.78% 4.91% 6.33% 8.85%
S&P 500 COMM SVC INDEX 15.69x 19.15x 5.51% 4.30% 22.04% 14.60%

Source: Capital IQ

 

  • Health care stocks in the S&P 500 appear to be one of the most attractive investment opportunities among US large-cap companies. Analysts forecast aggregate S&P 500 health care stocks to grow their EPS by 32.30% over the next 12 months and 16.62% per annum over the next 3 years. While S&P 500 health care stocks are expensive on a trailing basis (represented by second-most expensive trailing P/E multiple among S&P 500 sectors), their strong forecasted growth drives their next-12-months P/E multiple to be an inexpensive 15.37x, the fourth-cheapest in the S&P 500.
     
  • It is worth noting that, while S&P 500 health care stocks are attractive in terms of projected growth and forward trading multiples, their ROE Dupont analysis does not impress. The aggregate ROE of S&P 500 health care stocks is a mediocre 15.27%, placing it at the median of S&P 500 sectors. S&P 500 health care stocks also maintain a dismal 6.41% net profit margin, the third-worst among S&P 500 sectors and just 1 basis point above the S&P 500 industrials sector’s net profit margin. The only bright spot in the ROE Dupont analysis of S&P 500 health care stocks appears to be in their Sales/Assets ratio of 0.85x, the third-most attractive among S&P 500 sectors.

S&P 500 Sector Index ROE Dupont Breakdown

  T12M ROE T12M Operating Margin T12M Net Profit Margin T12M Sales / Assets Assets / Equity
S&P 500 CONS DISCRET INDEX 25.61% 8.38% 5.76% 1.01x 4.26x
S&P 500 CONS STAPLES INDEX 26.34% 9.37% 7.00% 1.12x 3.17x
S&P 500 INFO TECH INDEX 27.83% 23.87% 16.77% 0.59x 2.77x
S&P 500 FINANCIALS INDEX 12.61% 22.78% 19.37% 0.07x 8.13x
S&P 500 HEALTH CARE INDEX 15.27% 9.51% 6.41% 0.85x 2.72x
S&P 500 INDUSTRIALS INDEX 18.18% 9.52% 6.40% 0.71x 3.87x
S&P 500 ENERGY INDEX 12.13% 8.24% 8.28% 0.69x 1.93x
S&P 500 UTILITIES INDEX 10.32% 16.73% 11.43% 0.24x 3.56x
S&P 500 MATERIALS INDEX 13.51% 11.03% 9.12% 0.61x 2.27x
S&P 500 COMM SVC INDEX 22.53% 18.98% 19.94% 0.45x 2.47x

Source: Capital IQ

 

  • S&P 500 information technology stocks also appear to be an attractive potential investment opportunity. While S&P 500 information technology stocks are neither expensive nor cheap on a forward and trailing basis, their ROE Dupont analysis is the most attractive among S&P 500 sectors. S&P 500 information technology stocks maintain an extremely attractive aggregate ROE of 27.83% and aggregate operating margin of 23.87%, both of which are the best among S&P 500 sectors. Information technology stocks in the S&P 500 also maintain an aggregate net profit margin of 16.77%, the third-best among S&P 500 sectors.  
     
  • Finally, S&P 500 financials stocks are also an attractive potential investment opportunity. S&P 500 financials stocks maintain the cheapest aggregate P/E multiples, both on a forward and trailing basis, among S&P 500 sectors. Additionally, S&P 500 financials stocks maintain the most attractive aggregate trailing EBIT/EV and aggregate trailing free cash flow yield, calculated as 8.63% and 8.14%, respectively.
     
  • In addition to their attractive trading multiples, S&P 500 financials stocks maintain the second-highest operating margin and net profit margin among S&P 500 sectors, calculated as 22.78% and 19.37%, respectively. S&P 500 financials stocks do, however, maintain the least attractive Sales/Assets and Assets/Equity ratio among S&P 500 sectors, which can be attributed to financial companies’ reliance on asset-heavy business practices.

 


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