The big-money "1 per cent" of Canada's financial industry will be trundling back from the cottage in the next few weeks and trading volumes will be moving higher accordingly. This is a good time for a back-to-school recap of domestic sector performance and valuation levels.
The accompanying chart shows the year to date performance and changes in price earnings levels for all major S&P/TSX subsectors except two – the S&P/TSX Health Care and S&P/TSX Information Technology Index – because they wouldn't fit on the chart.
The health care index is dominated by Valeant Pharmaceuticals Internationals Inc., which at the end of 2013 had a trailing price earnings ratio so high that it drove the average valuation for the subindex to 252 times (it's 153 times now). The health care index was the worst performer year to date with a meagre 2.0 per cent return.
Similarly, the BlackBerry-centric information technology index has a trailing price earnings ratio of 96 times, up from 50 times at the end of 2013. The S&P/TSX Information Technology Index has nonetheless generated a strong return of 17.9 per cent so far this year.
On the chart, the sectors are ranked by year to date performance, left to right. The S&P/TSX Energy index remains the year's top performer as it recovers from a recent 5.5 per cent swoon from the June 16 highs. Strong returns from railway stocks pushed domestic industrials to the No. 2 slot and consumer staples were close behind. Telecom services and utilities stocks have been the laggards so far.
Surprisingly, the top performing market sector, energy, is the only case where valuation levels are now more attractive than at the beginning of the year. The average trailing price earnings ratio is now 26.2 times, a marginal improvement on December's 27.1 times.
The evolution of materials stock valuations is a bit alarming. The S&P/TSX Materials index began the year with an average P/E ratio of 19.3 times but it now stands at 33.0 times. Stock prices in the sector appear to have gotten well ahead of earnings growth.
Valuation levels for consumer staples stocks are also significantly less attractive than at the beginning of 2014. The average price earnings ratio has climbed from 18.1 times to 23.5.
Investors reviewing their portfolios as the fourth quarter begins should pay close attention to current valuation levels in materials stocks. Average valuation levels indicate risks are rising in the sector and some trimming may be in order.
More positively, the energy sector has just undergone a correction and it's the one sector where valuations are improving and investing bargains may be available.
Follow Scott Barlow on Twitter @SBarlow_ROB.