For today’s column we’ll look at returns by sector – on a year-to-date and 10-year compound annual basis – for each of the 11 sectors on the TSX in an effort to illustrate the sectors that could be overvalued or undervalued.
The S&P/TSX Composite Index is up 21.8 per cent year-to-date and 21.9 per cent on a one-year basis, as of Sept. 30. It is among the strongest-performing markets globally over the past 12 months. Key ratios for the index are: price-to-earnings (P/E) ratio at 21.3, price-to-book at 2.5 and price-to-sales at 2.5. To compare with historic figures, the 5-year, 10-year, and 20-year average PE ratios for that index are all close to 15.
What are we looking for: the sectors
We wanted to have a look at sector performance year-to-date as well as valuation by sector and market-cap class (large vs. small cap). To start, here are the 11 sectors used for major North American exchanges.
- Communications services: companies providing communications services;
- Consumer discretionary: companies selling non-essential goods and services;
- Consumer staples: companies selling essential goods and services that consumers need, regardless of economic conditions;
- Energy: companies involved in the exploration, production, and distribution of energy;
- Financials: companies in the banking, insurance and investment industries;
- Health care: companies in biotechnology, pharmaceuticals and medical equipment
- Industrials: companies involved in manufacturing, transportation, and logistics;
- Information technology: companies involved in the design, development and support of computer hardware, software and services;
- Materials: companies that produce raw materials, including chemicals and metals;
- Real estate: companies involved in property ownership, management, and development;
- Utilities: companies that provide electric, gas and water services
About the index and its sector constituents:
The S&P/TSX Composite Index is weighted by float-adjusted market capitalization – meaning the total value of shares available for public trading, excluding restricted shares. According to data from S&P Dow Jones Indices, the top 10 stocks by market cap comprise 36.7 per cent of the index’s total weight. Large-cap names, especially major banks and energy firms, have an outsized influence on index performance.
Financials are the largest sector by weighting in the index at 32 per cent, followed by materials at 17 per cent and energy at 16 per cent, and industrials at 11 per cent. Information technology (10), utilities (4), consumer staples (3), consumer discretionary (3), communication services (2), real estate (2) and health care (less than 1 per cent) make up the balance.
The combined market capitalization of the index is about $4.8-trillion, with Royal Bank being the largest component by value at $288-billion. For perspective, Nvidia, Microsoft and Apple each have larger market capitalizations than this index.
The analysis:
We ran the year-to-date values in the table below along with our sector valuations. To generate the valuations by sector we tally up all of the stocks in that sector (we do this for industries and ETFs and well), weighted by market cap. Generally, when we value sectors like this, we see small (less than 10 percentage points) differences between overall price (or index) and valuation, given that under- and overvalued stocks tend to balance out within the sector. Let’s look at a couple of these sectors and the full list of sectors below:
Materials: The materials sector is up almost 80 per cent year-to-date as shown in the table here. This sector contains a number of industries we are globally known for, including base and precious metals, chemicals, steel, forest products and agriculture. There are a number of stocks in the this sector (concentrated in the gold and silver industries) that are up more than 100 per cent, including Agnico Eagle Mines Ltd. AEM-T, First Majestic Silver Corp. AG-T and Kinross Gold Corp. K-T. Our valuations currently show the sector overvalued by 17 to 20 per cent (large and small-cap groupings, respectively).
Health care: This sector has been one of the year’s laggards, down 15 per cent so far. This is a very small sector in Canada, representing less than 1 per cent of the overall index. This subindex is composed of only four stocks in fact: Chartwell Retirement Residences CSH-UN-T, Bausch Health Cos. Inc. BHC-T, Curaleaf Holdings Inc. CURA-T and Sienna Senior Living Inc. SIA-T. We only have the small-cap companies within this index, with the overall valuation being slightly overvalued.
You can see in the accompanying table each sector’s index value, year-to-date and 10-year compound annual growth rate (CAGR) returns, the number of large- and small-cap stocks by sector and our valuation difference versus the various indexes broken down by market-cap class: The overall index looks slightly overvalued by just over 6 per cent. Real estate, along with a few small-cap groupings, appears to be the only sector currently undervalued based on our analysis.
More about StockCalc
StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can access StockCalc using the promo code ‘Globe30’, which offers a 30-day free trial and special pricing for the second month.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis. Brian Donovan, CBV is the President of a Canadian FinTech based in Miramichi, New Brunswick.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.