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Summary The Materials sector ranks seventh in Q4’15. Based on an aggregation of ratings of 12 ETFs and 14 mutual funds. IYM is our top-rated Materials sector ETF and FSCHX is our top-rated Materials sector mutual fund. The Materials sector ranks seventh out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report . Last quarter , the Materials sector ranked sixth. It gets our Neutral rating, which is based on an aggregation of ratings of 12 ETFs and 14 mutual funds in the Materials sector. See a recap of our Q3’15 Sector Ratings here . Figure 1 ranks from best to worst the nine Materials ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated Materials mutual funds. Not all Materials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 139). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Materials sector should buy the Attractive rated mutual fund from Figure 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The ProShares Ultra Basic Materials ETF (NYSEARCA: UYM ), the Van Eck Market Vectors Steel Index ETF (NYSEARCA: SLX ), and the Fidelity MSCI Materials Index ETF (NYSEARCA: FMAT ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Rydex Series Basic Materials Fund (MUTF: RYBOX ) (MUTF: RYBAX ) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums. The iShares Dow Jones U.S. Basic Materials Index ETF (NYSEARCA: IYM ) is the top-rated Materials ETF and the Fidelity Select Chemicals Portfolio (MUTF: FSCHX ) is the top-rated Materials mutual fund. IYM earns a Neutral rating and FSCHX earns an Attractive rating. The PowerShares S&P SmallCap Materials Portfolio ETF (NASDAQ: PSCM ) is the worst-rated Materials ETF and the ICON Materials Fund (MUTF: ICBAX ) is the worst-rated Materials mutual fund. PSCM earns a Dangerous rating and ICBAX earns a Very Dangerous rating. 168 stocks of the 3000+ we cover are classified as Materials stocks. LyondellBasell Industries (NYSE: LYB ) is one of our favorite stocks held by Materials ETFs and mutual funds and earns our Attractive rating. Since 2011, Lyondell has grown after-tax profit ( NOPAT ) by 11% compounded annually. Over the same timeframe, the company has improved its return on invested capital ( ROIC ) from 17% to a top-quintile 23%. While LYB is up nearly 20% year-to-date, shares could still have large upside for long-term investors. At its current price of $93/share, LYB has a price to economic book value ( PEBV ) ratio of 1.0. This ratio implies that the market expects Lyondell’s profits to never grow from current levels. If Lyondell can grow NOPAT by just 5% compounded annually for the next five years , the stock is worth $115/share today – a 24% upside. Friedman Industries, Inc. (NYSEMKT: FRD ) is one of our least favorite stocks held by Materials ETFs and mutual funds and earns our Very Dangerous rating. Friedman’s NOPAT has rapidly declined since 2011, from $11 million to -$5 million in 2015. Friedman has also been inefficient at managing its invested capital , and its ROIC has fallen from 19% to a bottom quintile -7% over the same timeframe. Despite the struggling business, FRD has outperformed the overall market over the past six months and is now significantly overvalued. To justify the current price of $6/share, Friedman must immediately achieve positive pre-tax margins of 1%, (compared to -4% in 2015) and grow revenues by 20% compounded annually for the next 12 years . This scenario seems unlikely considering the company’s revenues and profits have only fallen over the past decade. Figures 3 and 4 show the rating landscape of all Materials ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector or theme. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Scalper1 News
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