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Best And Worst Q3’15: Industrials ETFs, Mutual Funds And Key Holdings

Summary Industrials sector ranks third in Q3’15. Based on an aggregation of ratings of 19 ETFs and 17 mutual funds. XLI is our top-rated Industrials ETF and FSRFX is our top-rated Industrials mutual fund. The Industrials sector ranks third out of the 10 sectors as detailed in our Q3’15 Sector Ratings for ETFs and Mutual Funds report. It gets our Neutral rating, which is based on aggregation of ratings of 19 ETFs and 17 mutual funds in the Industrials sector. See a recap of our Q2’15 Sector Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Industrials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 347). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Industrials sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 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 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 Fidelity Select Environment and Alt Energy Portfolio (MUTF: FSLEX ) and the Rydex Transportation Fund (MUTF: RYPIX ) (MUTF: RYPAX ) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) is the top-rated Industrials ETF and the Fidelity Select Transportation (MUTF: FSRFX ) is the top-rated Industrials mutual fund. Both earn an Attractive rating. The First Trust RBA American Industrial Renaissance ETF (NASDAQ: AIRR ) is the worst-rated Industrials ETF and the ICON Industrials Fund (MUTF: ICIAX ) is the worst-rated Industrials mutual fund. Both earn a Dangerous rating. 418 stocks of the 3000+ we cover are classified as Industrials stocks. Deere & Company (NYSE: DE ) is one of our favorite stocks held by Industrials ETFs and mutual funds and earns our Attractive Rating. Since 2008 the company has grown after-tax profit (NOPAT) by 8% compounded annually. Deere currently generates a top-quintile return on invested capital ( ROIC ) of 16%. Falling agriculture prices have brought Deere’s stock price down over the past year, and we think this drop gives long-term investors an excellent buying opportunity. At its current price of $92/share, Deere has a price to economic book value ( PEBV ) ratio of 0.6. This ratio implies the market expects Deere’s profits to permanently decline by 40%. This expectation seems unduly low and likely reflects a market overreaction to issues and a failure to recognize the leading position Deere holds in the agriculture industry. Deere currently has an economic book value , or no growth value of $153/share – a 66% upside. FedEx Corporation (NYSE: FDX ) is one of our least favorite stocks held by Industrials ETFs and mutual funds and earns our Very Dangerous rating. Since 2007 the company has only been able to grow NOPAT by 1% compounded annually. Over the same time frame, ROIC has fallen from 9% to 6% and NOPBT margins have fallen from 11% to 9%. When generating over $40 billion in revenue, a 200 basis point decline in margin greatly affects FedEx’s profitability. Despite these fundamental issues, the risk in the stock’s high valuation should give investors pause. To justify its current price of ~$170/share, FedEx must grow NOPAT by 10% for the next 24 years . Expecting the company to increase its NOPAT growth rate tenfold and maintain that rate for 24 years after years of lackluster NOPAT growth seems risky. Figures 3 and 4 show the rating landscape of all Industrials 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 D isclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Best And Worst Q3’15: Energy ETFs, Mutual Funds And Key Holdings

Summary The Energy sector ranks last in Q3’15. Based on an aggregation of ratings of 20 ETFs and 90 mutual funds in the Energy sector. OIH is our top-rated Energy ETF and FSESX is our top-rated Energy mutual fund. The Energy sector ranks last out of the 10 sectors as detailed in our Q3’15 Sector Ratings for ETFs and Mutual Funds report. It gets our Dangerous rating, which is based on aggregation of ratings of 20 ETFs and 90 mutual funds in the Energy sector. See a recap of our Q2’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Energy sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 163). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Energy sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 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 PowerShares Dynamic Oil & Gas Services Portfolio ETF (NYSEARCA: PXJ ) is excluded from Figure 1 because its 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 Market Vectors Oil Services ETF (NYSEARCA: OIH ) is the top-rated Energy ETF and the Fidelity Select Energy Service Portfolio (MUTF: FSESX ) is the top-rated Energy mutual fund. OIH earns our Attractive rating and FSESX earns our Neutral rating. The PowerShares DWA Energy Momentum Portfolio ETF (NYSEARCA: PXI ) is the worst-rated Energy ETF and the Saratoga Energy & Basic Materials Fund (MUTF: SBMBX ) is the worst-rated energy mutual fund. Both earn a Very Dangerous rating. 187 stocks of the 3000+ we cover are classified as energy stocks. National-Oilwell Varco (NYSE: NOV ) is one of our favorite stocks held by Energy ETFs and mutual funds and earns our Very Attractive rating. Since 2009, National Oilwell has grown after-tax profit ( NOPAT ) by 11% compounded annually. National Oilwell has a return on invested capital ( ROIC ) of 10% and over $4 billion in free cash flow on a trailing twelve-month basis. Due to the recent decline in energy-related securities, NOV can be purchased well below its fair value. At its current price of ~$43/share, NOV has a price to economic book value ( PEBV ) ratio of 0.6. This ratio implies that the market expects National Oilwell’s NOPAT to permanently decline by 40%. If National Oilwell can grow NOPAT by just 3% compounded annually for the next six years , the stock is worth $80/share today – an 86% upside. Marathon Petroleum Corp (NYSE: MPC ) is one of our least favorite stocks held by Energy ETFs and mutual funds and earns our Very Dangerous rating. Marathon’s NOPAT has declined from $3.3 billion in 2011 to -$589 million in 2014. ROIC has also fallen from 15% to 1%. Investors not reading the footnotes would be unaware of the deteriorating business fundamentals. Due to a change in LIFO inventory value we remove $3.4 billion from Marathon’s 2014 income statement. Without making this adjustment the market has been led to believe that profits actually grew in 2014. The disconnect between NOPAT and net income could explain why MPC is up 39% over the last year despite the Energy sector being down 27%. To justify its now overvalued price of $56/share, MPC must grow revenues by 16% compounded annually for the next 13 years while also raising its current NOPAT margin from -0.6% to 2.5%. Marathon has only grown revenue by 8% compounded annually since 2011. Expecting Marathon to double its revenue growth in a weak Energy environment and maintain that high level for over a decade seems rather optimistic. Figures 3 and 4 show the rating landscape of all Energy 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 D isclosure: David Trainer and Allen Jackson receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

How To Avoid The Worst Style Mutual Funds: Q2’15 In Review

Summary The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds. The following presents the least and most expensive style mutual funds as well as the worst overall style mutual funds per our 2Q15 style ratings. Question: Why are there so many mutual funds? Answer: Mutual fund providers tend to make lots of money on each fund so they create more products to sell. The large number of mutual funds has little to do with serving investors’ best interests. Below are three red flags investors can use to avoid the worst mutual funds: 1. Inadequate Liquidity This issue is the easiest issue to avoid, and our advice is simple. Avoid all mutual funds with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the mutual fund and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the mutual fund and larger bid-ask spreads. 2. High Fees Mutual funds should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in mutual funds with total annual costs below 1.95%, which is the average total annual cost of the 6391 U.S. equity Style mutual funds we cover. Figure 1 shows the most and least expensive style mutual funds. Empiric provides one of the most expensive mutual funds while Vanguard mutual funds are among the cheapest. Figure 1: 5 Least and Most Expensive Style Mutual Funds Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The E aton Vance Hexavest U.S. Equity Fund (MUTF: EHUIX ) earns our Very Attractive rating and has low total annual costs of only 1.22%. On the other hand, no matter how cheap a mutual fund, if it holds bad stocks, its performance will be bad. The quality of a mutual fund’s holdings matters more than its price. 3. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad mutual funds, but it is also the most important because a mutual fund’s performance is determined more by its holdings than its costs. Figure 2 shows the mutual funds within each style with the worst holdings or portfolio management ratings . Figure 2: Style Mutual Funds with the Worst Holdings Sources: New Constructs, LLC and company filings Northern Lights appears more often than any other providers in Figure 2, which means that they offer the most mutual funds with the worst holdings. Our overall ratings on mutual funds are based primarily on our stock ratings of their holdings. The Danger Within Buying a mutual fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on mutual fund holdings is necessary due diligence because a mutual fund’s performance is only as good as its holdings’ performance. PERFORMANCE OF MUTUAL FUND’s HOLDINGs = PERFORMANCE OF MUTUAL FUND Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.