Tag Archives: lightbox

Manufacturing Churns Out Slow Growth In U.S. – ETFs In Focus

U.S. manufacturing is yet to recover from prolonged sluggishness. This was indicated by the recent manufacturing report from the Institute for Supply Management (ISM). As per ISM, the reading was 50.8 in April (a reading of 50 or higher points to growth), down from 51.8 recorded in March. Economists had forecast the index to decline to 51.4% (read: ETFs to Watch on U.S. Manufacturing Revival ). Though the latest reading has come in above 50 for the second successive month and was the second best number in the last eight months, the sequential decline may subdue investors’ optimism over the sector. New orders index to 55.8% from 58.3% in March. Huge capex cuts by energy companies to fight back the plunge in oil prices and still-sluggish export demand in the wake of global growth issues kept a check on the sector. However, investors should note that export orders touched a 17-month high. A comparable industry measure compiled by Markit also point to the same trend. Markit’s final U.S. manufacturing PMI fell to 50.8% in April from 51.5% in March. As per trading economics , input costs bucked the trend at the manufacturing sector as pressures building up lately defying the prolonged trend of decline. This was because raw materials’ costs crept up leading to higher input costs. However, output prices fell resulting in reducing pricing power. Market Impact Most of the industrial ETFs were in the green post release of the manufacturing data. ETFS like the PowerShares DWA Industrials Momentum Portfolio ETF (NYSEARCA: PRN ), the iShares U.S. Industrials ETF (NYSEARCA: IYJ ) and the Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) added small gains on May 2, 2016 ( see all industrials ETFs here ). Bottom Line While the latest data was nowhere near impressive, it can be seen as a slowly improving trend. ISM Employment Index was 49.2% in April versus 48.1% registered in March, revealing that the decline in employment – this time for the fifth successive month — is finally slowing. ISM noted that out of the 18 manufacturing sectors under coverage, 11 logged growth in employment in April. On the other hand, the long-tottering energy sector might be on an upward trajectory in the days to come on an oil price recovery. This can spell optimism for the manufacturing sector as a whole. Moreover, the U.S. labor market remains healthy. This should also back consumers’ purchasing power, boost demand for goods and result in higher factory activity. A still-low interest rate environment in the U.S. should also favor the industry as the sector depends on interest rates for its operations. The scenario beyond the U.S. border should also gain steam on a huge round of monetary easing. In conclusion, we would like to note that a full-fledged recovery may take more time than previously envisaged. So, as of now, it is better to bet on our top-rated industrial ETFs PowerShares Dynamic Building & Construction ETF (NYSEARCA: PKB ) – a key beneficiary of the solid construction spending in the U.S. – and the First Trust Industrials AlphaDEX ETF (NYSEARCA: FXR ) . On May 2, 2016, PKB and FXR were up 1.52% and 0.44%, respectively. Both carry a Zacks ETF Rank #2 (Buy). Link to the original post on Zacks.com

What’s In A Multiple?

What’s a company worth? Seasoned investors know that finding the answer to that question is more art than science. One way to do so is from the bottom up, to calculate a firm’s intrinsic value using a discounted cash flow methodology. The other is to come at the question from the top down, by using a relative valuation approach via market multiples. While there are many types of multiples, each reflects the market’s evaluation of a company’s expected operational performance, and can be used to cut across times, sectors, and markets. Investor expectations about future revenue growth and profitability both play a key role in driving multiples. Investors obviously prefer high levels of both. But if there’s only one to be had, which combination do investors value more highly? Superior growth and low profitability? Or lower growth and high profitability? Credit Suisse recently analyzed the performance and multiples of companies with market capitalizations of more than $1 billion (excluding financial firms and utilities) between 2004 and 2015, to find out. Not surprisingly, the bank found that companies with above-median projected growth in revenue and above-median projected profitability traded at an 11.5x EV/EBITDA multiple, compared to just 7.5x for firms with below-median estimates for future revenue growth and profitability. (For reference, the median projected revenue growth was 5.4 percent and the median profitability was 6.5 percent cash flow return on investment.) But back to the question of revenue growth versus profitability. It turns out that firms with below-median forecasted growth but above-median projected profitability earned higher EV/EBITDA multiples (10.2x) than faster-growing but less profitable companies (8.7x). Furthermore, increases in expected profitability had more of an effect on valuations than did an increase in expected sales. Regardless of whether a company is expected to grow above or below the market median, if it manages to improve profitability above median levels, the effect is dramatic – an additional 2.7 times enterprise value relative to the company’s forward cash flows. That was more than twice the effect that improving revenue growth – an additional 1.2 times EV/EBITDA – awarded to those companies that managed to climb into above-median revenue growth territory. Those that were able to vault over the median in both categories saw multiples rise by 4x EV/EBITDA. In short, growth matters more when you combined it with superior return on capital. Source: Credit Suisse HOLT Corporate Advisory It’s interesting to note that the current preference for profitability over growth is a relatively recent phenomenon. Between 2004 and 2007, companies with above-average revenue growth expectations traded at higher valuations than those with high profit expectations. During the financial crisis, there was no clear pattern to investor preferences, but high-profitability companies began to deliver higher premiums in 2012. One possible rationale for the shift: Over the past decade, it’s been easier to keep returns on capital up than to produce drastic increases in sales. Fewer than one-third (29 percent) of companies that produced above-average revenue growth between 2004 and 2009 did the same between 2010 and 2015, while nearly two-thirds (64 percent) of companies that were highly profitable in the first five-year period remained so in the second. Investors, in other words, can be fickle. So how should that affect executive decision-making? For executives making resource allocation decisions, it’s clear that both profitability and growth matter. But understanding exactly what drives investor sentiment about a company is important not only in choosing between competing strategies – those promising faster growth or superior profitability (or, in an ideal world, both) – but also what to buy and how to buy it. Knowing how expectations of future growth and profitability drive valuations can help companies decide on the right price to pay for potential targets as well as secondary decisions, such as whether equity or cash purchases make more sense. In other words, multiples matter for more than just bragging rights. Original Post

Best And Worst Q2’16: Consumer Discretionary ETFs, Mutual Funds And Key Holdings

The Consumer Discretionary sector ranks fifth out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Consumer Discretionary sector ranked fifth as well. It gets our Neutral rating, which is based on aggregation of ratings of 13 ETFs and 19 mutual funds in the Consumer Discretionary sector. See a recap of our Q1’16 Sector Ratings here . Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the sector. Not all Consumer Discretionary sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 389). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Discretionary 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 PowerShares Dynamic Retail Portfolio (NYSEARCA: PMR ), PowerShares S&P SmallCap Consumer Discretionary Portfolio (NASDAQ: PSCD ), and Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (NYSEARCA: RCD ) 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 ICON Consumer Discretionary Fund (MUTF: ICCCX ), Rydex Series Leisure Fund (RYLIX, RYLAX) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. PowerShares Dynamic Leisure & Entertainment Portfolio (NYSEARCA: PEJ ) is the top-rated Consumer Discretionary ETF and Fidelity Select Leisure Portfolio (MUTF: FDLSX ) is the top-rated Consumer Discretionary mutual fund. PEJ earns a Very Attractive rating and FDLSX earns an Attractive rating. SPDR S&P Retail ETF (NYSEARCA: XRT ) is the worst rated Consumer Discretionary ETF and Rydex Series Retailing Fund (MUTF: RYRTX ) is the worst-rated Consumer Discretionary mutual fund. XRT earns a Neutral rating and RYRTX earns a Very Dangerous rating. 451 stocks of the 3000+ we cover are classified as Consumer Discretionary stocks. Carnival Corporation (NYSE: CCL ) is one of our favorite stocks held by PEJ and earns an Attractive rating. Since 1998, Carnival has grown after-tax profit ( NOPAT ) by 6% compounded annually. The company currently earns a 7% return on invested capital ( ROIC ), which is improved from the 4% earned in 2013. Over the past five years, Carnival has generated a cumulative $8 billion in free cash flow ( FCF ). Best of all, CCL is currently undervalued. At its current price of $49/share, CCL has a price-to-economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Carnival’s NOPAT to never meaningfully grow from current levels. If Carnival can grow NOPAT by just 4% compounded annually for the next decade , the stock is worth $68/share today – a 39% upside. Amazon.com (NASDAQ: AMZN ) remains one of our least favorite stocks held by RYRTX and earns a Dangerous rating. Over the past decade, Amazon’s economic earnings have declined from $242 million to -$508 million. The company’s ROIC has declined from 27% in 2005 to 6% in 2015, which represents a clear sign that Amazon’s low margin, grow at all costs business strategy has been an inefficient use of capital. Worst of all, the expectations baked in AMZN already imply the company will be wildly profitable. To justify the current stock price of $667/share, AMZN must grow NOPAT by 22% compounded annually for the next 20 years . In this scenario, 20 years from now, Amazon would be generating over $8 trillion in revenue. Such expectations seem irrationally exuberant and make AMZN one to avoid. Figures 3 and 4 show the rating landscape of all Consumer Discretionary 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 Kyle Guske II 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. 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.