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Best And Worst Q3’15: Mid Cap Growth ETFs, Mutual Funds And Key Holdings

Summary The Mid Cap Growth style ranks eighth in Q3’15. Based on an aggregation of ratings of 11 ETFs and 382 mutual funds. MDYG is our top-rated Mid Cap Growth ETF and IMIDX is our top-rated Mid Cap Growth mutual fund. The Mid Cap Growth style ranks eighth out of the 12 fund styles as detailed in our Q3’15 Style Ratings for ETFs and Mutual Funds report. It gets our Neutral rating, which is based on an aggregation of ratings of 11 ETFs and 382 mutual funds in the Mid Cap Growth style. See a recap of our Q2’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Mid Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 23 to 626). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Mid Cap Growth style 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 State Street SPDR S&P 400 Mid Cap Growth ETF (NYSEARCA: MDYG ) is the top-rated Mid Cap Growth ETF and the Professionally Managed Portfolios Congress Mid Cap Growth Fund (MUTF: IMIDX ) is the top-rated Mid Cap Growth mutual fund. Both earn an Attractive rating. The QuantShares U.S. Market Neutral Momentum Fund ETF (NYSEARCA: MOM ) is the worst-rated Mid Cap Growth ETF and the Starboard Investment Goodwood SMID Cap Discovery Fund (MUTF: GAMAX ) is the worst-rated Mid Cap Growth mutual fund. MOM earns a Neutral Rating and GAMAX earns a Very Dangerous rating. The Buckle, Inc. (NYSE: BKE ) is one of our favorite stocks held by Mid Cap Growth funds and earns our Very Attractive rating. Over the past decade, the company has grown after-tax profit (NOPAT) by 14% compounded annually. The company currently earns a top-quintile return on invested capital ( ROIC ) of 32%, which is more than double the 15% earned in 2005. Furthermore, Buckle has maintained a steady NOPAT margin of 15% for the past six years. Despite the fundamental strength of the business, its stock remains undervalued. At the current price of $40/share, Buckle has a price to economic book value ( PEBV ) ratio of 0.0. This ratio implies that the market expects Buckle’s profits to permanently decline by 20%. While the retail sector has its ups and downs, this low expectation ignores the profitability Buckle has maintained over its lifetime. If the company can grow NOPAT by just 6% compounded annually for the next ten years , the stock is worth $74/share – an 85% upside. ServiceNow (NYSE: NOW ) is one of our least favorite stocks held by Mid Cap Growth funds and earns our Dangerous rating. Much like other cloud companies we have covered, ServiceNow has never turned a profit since going public. NOPAT declined from -$30 million in 2012 to -$141 million in 2014. On top of falling profits, the company earns a bottom-quintile ROIC of -74%. Investors are ignoring these fundamental issues in favor of misleading revenue growth, and the stock remains overvalued as a result. To justify the current price of $69/share, ServiceNow must immediately achieve a positive pre-tax (NOPBT) margin of 10% (compared to -21% in 2014) and grow revenue by 31% compounded annually for the next 15 years . We feel the expectations embedded in NOW are far too optimistic. Figures 3 and 4 show the rating landscape of all Mid Cap Growth ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst 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, style, 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.

Best And Worst: Mid Cap Growth ETFs, Mutual Funds And Key Holdings

Summary Mid Cap Growth style ranks eighth in Q2’15. Based on an aggregation of ratings of 11 ETFs and 409 mutual funds. IJK is our top rated Mid Cap Growth ETF and IMIDX is our top rated Mid Cap Growth mutual fund. The Mid Cap Growth style ranks eighth out of the 12 fund styles as detailed in our Q2’15 Style Ratings report. It gets our Dangerous rating, which is based on an aggregation of ratings of 11 ETFs and 409 mutual funds in the Mid Cap Growth style. Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Mid Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 24 to 623). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Mid Cap Growth style 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. 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. The iShares S&P Mid-Cap 400 Growth ETF (NYSEARCA: IJK ) is our top-rated Mid Growth ETF and the C ongress Mid Cap Growth Fund Inst (MUTF: IMIDX ) is our top-rated Mid Cap Growth mutual fund. Both earn our Attractive rating. CF Industries Holdings (NYSE: CF ) is one of our favorite stocks held by Mid Cap Growth ETFs and mutual funds. CF has grown after-tax profit ( NOPAT ) by 14% compounded annually for the past five years and currently earns a 21% return on invested capital ( ROIC ) that places it in the top quintile of all companies we cover. CF has also generated positive economic earnings every year since 2007. The best news of all is that the market’s expectations for CF are very low, which leaves the company largely undervalued at its current price of ~$63/share. If CF can grow NOPAT by 10% compounded annually for the next five years , the stock is worth $85/share today – a 35% upside. CF’s track record of 14% compounded annual profit growth and strong returns on capital suggests that the market’s expectations should be easily achievable. The Ark Industrial Innovation ETF (NYSEARCA: ARKQ ) is our worst-rated Mid Cap Growth ETF and The Goodwood SMID Cap Discovery Fund (MUTF: GAMAX ) is our worst rated Mid Cap Growth mutual fund. ARKQ earns our Neutral rating and GAMAX earns our Very Dangerous rating. One of the worst stocks in Mid Cap Growth ETFs and mutual funds is Tuesday Morning Corporation (NASDAQ: TUES ). Since 2009 the company’s ROIC has never exceeded 5%. However, the company’s cost of capital (WACC) has been greater than ROIC over the same time frame. This has contributed to negative economic earnings every year for the past six years. NOPAT growth has been equally disappointing and over the last four years and has declined by 12% compounded annually over this timeframe. The decline is even more pronounced over longer periods. Over the last decade NOPAT has fallen from $69 million in 2004 to $9 million in 2014. NOPAT margin over this period has also declined from 8% in 2004 to just 1% in 2014. Despite low NOPAT growth and shareholder value destruction, the company has nearly tripled in share price since 2011, making the stock very overvalued. To justify its current price of $14/ share, the company would need to grow NOPAT by 20% for the next 15 years . This seems highly unlikely given Tuesday Morning’s consistently declining profits over the past decade. Figures 3 and 4 show the rating landscape of all Mid Cap Growth ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources Figures 1-4: New Constructs, LLC and company filings D isclosure: David Trainer and Allen L. Jackson receive no compensation to write about any specific stock, style, 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.