Tag Archives: comcast

Will Q2 Earnings Keep Retail Funds’ Momentum Alive?

Federal Reserve Chairwoman Janet Yellen sounded optimistic that the uptrend in retail and motor vehicle sales early in the second quarter may be indicative of improving consumer spending. In her testimony before Congress she said that consumer confidence is upbeat and consumer spending levels increased mostly in new cars and trucks. However, her statements come at a time when the June’s retail sales painted a dismal picture. June’s retail sales declined 0.3%. Sales excluding gasoline stations, auto-dealers and home improvement stores declined 0.1%. Reduction in consumer spending on cars, clothes, home furnishing and restaurants were cited to be the reasons behind this fall in retail sales. Retail sales figures in May were also trimmed from 1.2% to 1%. April’s figures were also revised lower. Signs of economic improvement, especially in the labor market have indicated that a rebound in consumer spending is in the offing. While this is true to a certain extent, the sector offers us a complex picture upon further examination. In fact, consumer staples and consumer discretionary may undergo declines in earnings according to our estimates. On the contrary, retail/wholesale may see an uptrend. This puts the spotlight on mutual funds focused on the retail sector. Before we look at favorably-ranked funds, let’s look at the current scenario. Troubles for Consumer Staples Despite improvement in the economic picture and job scenario coupled with lower fuel costs, many consumer staples companies are still struggling owing to a slowdown in international markets. This includes volatile equity markets and fears of a slowdown in China, sluggishness in Japan and an unfavorable economic environment in Europe. Weakening of many foreign currencies against the U.S. dollar, rapidly changing pricing policy, import controls in some emerging countries and political unrest in others is also hurting growth. In such a scenario, many companies in the consumer staples sector are resorting to tougher cost-control initiatives, accretive acquisitions and share buybacks. Some of these measures have met with success, but the sector as a whole faces several challenges. Is Consumer Discretionary a Good Bet? On first glance, consumer discretionary looks to be a good bet. There has been a slow but steady economic recovery since the second half of 2014, leading to better job prospects, improved business momentum and renewed optimism. Housing recovery, rising wages and cheaper fuel are the other positives. Companies operating in this space include fast-food restaurants, providers of entertainment products and services, makers of automobiles, textiles, apparels and luxury goods etc. These products and services will only be sought by consumers if they have sufficient disposable income. The latest decline in retail sales may indicate that consumers are being careful about where to spend money and to what extent. Some effects of the financial crisis seem to be lingering on especially when it comes to companies which deal in goods. The reason is that a strong dollar has made foreign products cheaper. According to the latest figures from the Department of Labor, prices of imported consumer goods excluding automobiles recorded the highest year-over-year decline in six years. This is bad news for retailers, though those companies from the sector offering services may be gaining from this trend. Retail Funds in Focus The upcoming earnings season has not painted a very optimistic picture as of now. Earnings for the S&P 500 components are projected to decline 6.7% year on year while revenues may drop 6%. Growth is projected to suffer across 9 out of 16 sectors. These 9 sectors may incur earnings decline. The Retail/Wholesale sector has a favorable trend. Earnings may improve 2.1% on 5.4% higher revenues. However, consumer staples and consumer discretionary are projected to see year-on-year earnings decline of 5.9% and 4.8% in the second quarter. Revenues for consumer staples may be up 0.7%, but declining by the same margin for consumer discretionary. The contradictions will keep investors on their toes. Looking at the buy-ranked mutual funds from the sector, Fidelity Select Automotive Portfolio (MUTF: FSAVX ) has average EPS growth rate of nearly 12%. FSAVX currently carries a Zacks Mutual Fund Rank #2 (Buy). The top holdings include major stocks from the automobile sector such as Toyota (NYSE: TM ), Ford (NYSE: F ), Tesla Motors (NASDAQ: TSLA ) and General Motors (NYSE: GM ). While General Motors has a negative Earnings ESP , the others have Earnings ESP of 0. Fidelity Select Retailing Portfolio (MUTF: FSRPX ) carries a Zacks Mutual Fund Rank #1 (Strong Buy) and the average EPS growth is 21.4%. FSRPX has strong year-to-date performance of 10.1% and the 3-year and 5-year annualized returns stand at 23.6% and 23.7%. Among the top holdings of the fund Amazon (NASDAQ: AMZN ), TJX Companies (NYSE: TJX ) and G-III Apparel (NASDAQ: GIII ) boast positive Earnings ESP of 33.3%, 5.3% and 5%. Another fund from the Fidelity family, Fidelity Select Consumer Discretionary Portfolio (MUTF: FSCPX ) that carries a Zacks Mutual Fund Rank #1 has an average EPS growth rate of 14.5%. This fund too has positive returns in all of the year-to-date, 1- year, and 3- and 5-year annualized periods. Among the top holdings, Walt Disney (NYSE: DIS ), Comcast Corp. (NASDAQ: CMCSA ) (NASDAQ: CMCSK ), L Brands (NYSE: LB ), and Amazon carry favorable Earnings ESP of 0.7%, 1.2%, 1.5% and 33.3%. All would want a promising second quarter earnings season. The earnings numbers will guide the retail sector investment instruments now and thus also put the spotlight on retail sector mutual funds. The medium to long-term prospects of the sector remains strong. Growth and consumer spending are expected to pick up over the rest of the year. This will lead to a recovery and even strong gains from these sectors generated by the consumer. Original Post

The IQ Merger Arbitrage ETF: A Unique ETF With A Built-In Downside Hedge

Summary I conducted a review of the IQ Merger Arbitrage ETF. I found that the IQ Merger Arbitrage ETF has significantly outperformed its peers because of the underlying strategy the ETF uses. In addition, the IQ Merger Arbitrage ETF has outperformed stocks on bonds during big down days. In this article, I will be reviewing the IQ ARB Merger Arbitrage ETF (NYSEARCA: MNA ) as an option for investors looking for a fund that is not highly correlated with stocks or bonds. I believe MNA is an ETF that investors can hide out in when the market panic sells like this past week with the crisis flavor of the week Greece, Puerto Rico, etc. MNA fits well into most portfolios because of the low correlation it has to stocks and bonds. The table below shows MNA is inversely correlated to the iShares Core Total U.S. Bond Market ETF (NYSEARCA: AGG ) and only has a 36% correlation to the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). With the bond market and the stock market in significant bull markets, there is a real possibility that both stocks and bonds could fall at the same time, which means non-correlated funds have the potential to be an intriguing addition to portfolio for diversification. MNA AGG SPY MNA 1 AGG -0.07 1 SPY 0.36 -0.11 1 Fund Investment Strategy MNA invests in companies that have been publicly announced as acquisition targets and hedges those positions with a broad market short hedge. When a deal is announced, there is a spread between the current trading price and the actual deal price. For example, stock XYZ is acquired for $50/share and after the announcement, XYZ is trading at $49/share. MNA would invest in shares of XYZ and capture the $1 difference between the acquisition price and the current price. As I will detail below in the performance section, MNA has a vastly different return profile than its competitors because it uses a broad market hedge instead of shorting specific stocks, which the competitors for MNA do. This is extremely important given current market conditions, because many companies that are making the acquisitions and thus the companies in the ProShares Merger ETF ( MRGR) and the Credit Suisse Merger Arbitrage Liquid Index ETN ( CSMA) are shorting increasingly along with the acquired company. The following chart shows a real-life example with CSMA having a long position in Time Warner Cable (NYSE: TWC ) and short position in Comcast (NASDAQ: CMCSA ). I assumed that CSMA purchased TWC on the day the deal was announced and showed the performance until April 24th of this year when the deal was called off. As you can see, this was a losing trade for CSMA because Comcast had a better performance than Time Warner Cable, which means that CSMA shorted the better performing company. (click to enlarge) Competition The three main competitors that MNA has are MRGR, CSMA and The Merger Fund (MUTF: MERFX ), which is a mutual fund. Costs: Below is a table, which shows that MNA is only 1 basis point more expensive than MRGR, which is a miniscule difference and is significantly cheaper than CSMA and MERFX. A low expense ratio does not mean that the performance will be better than its more expensive competitors; however, in this case, MNA has significantly outperformed its competitors because of the unique strategy that MNA uses. Expense Ratio MRGR 0.75% MNA 0.76% CSMA 1.05% MERFX 1.27% Performance The following charts show the total return performance of MNA compared to MRGR, CSMA and MERFX, with the charts and data coming from Dividend Channel’s total return calculator . MNA vs. Competitors As you can see in the chart below, MNA has significantly outperformed MRGR since December 2012, which was the start date for MRGR. The performance is not even close, and the funds are going in opposite directions, which shows the strategy MNA uses is superior to MRGR. (click to enlarge) The next chart shows MNA has significantly outperformed CSMA as well since CSMA started trading in October 2010. Up until the start of 2014, MNA and CSMA performed very closely; however, since then, the performance has diverged, because the stocks of the acquiring companies have rose significantly once a merger or acquisition was announced. (click to enlarge) The final chart shows MNA compared to MERFX, which is the widely held $5.3 billion in assets Merger Arbitrage mutual fund. Once again, the same pattern repeated itself with the performance of MNA diverging from the performance of MRFX over the last two years. (click to enlarge) MNA vs. SPY & AGG on worst days Using my ThinkorSwim platform, I looked at the five worst trading days for stocks [SPY] and bonds [AGG] and found that MNA performed well on those days when the broad stock market or bond market was down significantly. As you can see in the table below, the data clearly shows that MNA performs quite well during big down days in the market. SPY MNA AGG MNA 1/15/2015 -1.80% 0.33% 2/6/2015 -0.58% -0.03% 3/6/2015 -1.40% -0.31% 3/2/2015 -0.67% 0.10% 3/10/2015 -1.62% -0.10% 3/6/2015 -0.65% -0.31% 3/25/2015 -1.46% -0.34% 5/11/2015 -0.63% 0.20% 6/29/2015 -2.10% -0.33% 6/22/2015 -0.49% -0.17% Average -1.68% -0.15% Average -0.60% -0.04% Closing Thoughts In closing, I believe MNA is a quality choice for conservative investors who are looking for a non-correlated fund that can be a place to hide out in the event of some foreseen or unforeseen adverse market conditions. MNA is superior to its competitors, because it does not short the stocks of acquiring companies, which has been an excellent strategy in this market, and MNA performs well on days when stocks or bonds are declining significantly. If you are looking for income, MNA is not the fund for you, because MNA only pays an annual dividend if/when they do pay a dividend. Disclaimer: See here Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MNA over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I may initiate a position in MNA in the next month or two.