Tag Archives: macro-view

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

Summary Materials sector ranks sixth in Q3’15. Based on an aggregation of ratings of 12 ETFs and 15 mutual funds. FMAT is our top-rated Materials ETF and FSCHX is our top-rated Materials mutual fund. The Materials sector ranks sixth 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 an aggregation of ratings of 12 ETFs and 15 mutual funds in the Materials sector. See a recap of our Q2’15 Sector Ratings here. Figures 1 ranks all nine ETFs and Figure 2 ranks the five best and five worst mutual funds in the sector. Not all Materials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 27 to 139). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Materials 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 DWA Basic Materials Momentum Portfolio ETF (NYSEARCA: PYZ ), the ProShares Ultra Basic Materials ETF (NYSEARCA: UYM ) and the Guggenheim S&P Equal Weight Materials ETF (NYSEARCA: RTM ) 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 Fidelity MSCI Materials ETF (NYSEARCA: FMAT ) is the top-rated Materials ETF and the Fidelity Select Chemicals Portfolio (MUTF: FSCHX ) is the top-rated Materials mutual fund. FMAT earns a Neutral rating and FSCHX earns an Attractive rating. The iShares Goldman Sachs Natural Resources ETF (NYSEARCA: IGE ) is the worst-rated Materials ETF and the Rydex Series Basic Materials Fund (MUTF: RYBMX ) is the worst-rated Materials mutual fund. IGE earns a Neutral rating and RYBMX earns a Very Dangerous rating. 172 stocks of the 3000+ we cover are classified as Materials stocks. Compass Minerals International, Inc. (NYSE: CMP ) is one of our favorite stocks held by Materials ETFs and mutual funds and earns our Attractive rating. Since 2012, Compass Minerals has grown after-tax profit ( NOPAT ) by 18% compounded annually. The company’s return on invested capital ( ROIC ) has also improved the past three years and is currently a top-quintile 18%. In spite of Compass Minerals’ impressive fundamental performance, the stock remains undervalued. At its current price of ~$80/share, CMP has a price to economic book value ( PEBV ) ratio of 1.0. This ratio implies that the market expects NOPAT to never grow from its current level. However, if Compass Minerals can grow NOPAT by 6% compounded annually for the next six years , the stock is worth $104/share today – a 30% upside. Hecla Mining Company (NYSE: HL ) is one of our least favorite stocks held by Materials ETFs and mutual funds and earns our Very Dangerous rating. Since 2011, Hecla’s NOPAT has declined by 46% compounded annually while revenue has only grown by 1% compounded annually. Hecla’s bottom quintile ROIC of 1% is well below the 14% it earned in 2011 as well. Unfortunately for investors, despite the stock price being down 14% YTD, it remains overvalued. To justify its current price of ~$2/share, Hecla must grow NOPAT by 14% compounded annually for the next 21 years . Two decades of double digit profit growth is a hurdle for even the best of companies and even more so for one that hasn’t grown NOPAT over the past four years. 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 D isclosure: David Trainer, Kyle Guske II, 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.

Expensive Junk Stocks Are Killing High-Quality Value Stocks, YTD

By Wesley R. Gray, Ph.D. In general, investors focused on affordable stocks with strong fundamentals have been taken to the cleaners year-to-date. Meanwhile, expensive stocks with poor fundamentals have been rocking ! Some Basic Statistics: Below, we document some core performance figures using Ken French’s data on value/growth portfolios (proxy for cheap/expensive) and high-profitability/low-profitability portfolios (proxy for high-quality/low-quality). We look at the value-weight returns for the top and bottom decile portfolios. The monthly returns runs from 1/1/2015 to 6/30/2015. Results are gross of fees. All returns are total returns, and include the reinvestment of distributions (e.g., dividends). Specifically, here are the four portfolios: Expensive = Value-weight returns to the bottom decile formed on B/M. Cheap = Value-weight returns to the top decile formed on B/M. Low-Quality = Value-weight returns to the bottom decile formed on profitability. High-Quality = Value-weight returns to the top decile formed on profitability. Here are the month-by-month results – a nasty year for cheap value stocks (as proxied by B/M) and high-quality stocks (as proxied by profitability): Month Expensive Cheap Outcome Low-Quality High-Quality Outcome 201501 0.04% -6.87% Lose -1.68% -2.17% Lose 201502 6.71% 3.56% Lose 9.64% 6.55% Lose 201503 -0.69% -1.59% Lose -0.31% -0.66% Lose 201504 0.19% 1.81% Win -0.53% 0.80% Win 201505 2.17% 0.58% Lose 5.18% 0.78% Lose 201506 0.61% -0.71% Lose -1.38% -1.24% Win The results are hypothetical, and are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. How have Expensive Low-Quality Stocks Performed Relative to Cheap High-Quality Stocks? In this section we look at the YTD performance of expensive low-quality stocks versus cheap high-quality stocks. We examine value-weight returns for the cheap high-quality quintile and the expensive low-quality quintile. The daily returns run from 1/1/2015 to 6/30/2015. Results are gross of fees. All returns are total returns, and include the reinvestment of distributions (e.g., dividends). Specifically, here are the two portfolios: Cheap, High-Quality = Value-weight returns to the cheap high-quality quintile . Expensive, Low-Quality = Value-weight returns to the expensive low-quality quintile . (click to enlarge) The results are hypothetical, and are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Year-to-date, a portfolio of cheap high-quality socks is down around 6% , before fees and expenses (probably more like -7% if those were included). In contrast, a portfolio of the most expensive, lowest-quality firms is up around 12% , before fees and expenses (probably around 11% after fees). On net, the spread is almost 18% YTD. Incredible, but not unsurprising . When we look to the marketplace for live strategies focused on market-neutral strategies anchored on cheapness and quality, Gotham Funds’ Gotham Neutral Fund (MUTF: GONIX ) is probably the most prominent example. The fund isn’t completely market-neutral, but at a 25% net long exposure, that is about as close as we’re gonna get. YTD, the Gotham Neutral Fund is down 10.39%. That is pretty terrible, and it would have been worse if they were truly market-neutral, but in the context of the results above, where one goes long generic value/quality and short generic expensive/junk, -10%+ isn’t half bad . One could argue on a factor basis that they added value (I know, that sounds odd). As we’ve said time and time again, active value investing has been digging manager graveyards since 1900 … but that is the nature of the active value investing game… long horizons are required, and volatility relative to the standard benchmarks can be expected. Original Post