Tag Archives: macro-view

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

Summary Information Technology sector ranks second in Q3’15. Based on an aggregation of ratings of 28 ETFs and 129 mutual funds. TDIV is our top-rated Information Technology ETF and ROGSX is our top-rated Information Technology mutual fund. The Information Technology sector ranks second 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 28 ETFs and 129 mutual funds in the Information Technology sector as of July 9, 2015. 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 Information Technology sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 23 to 397). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Information Technology 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 First Trust NASDAQ Technology Dividend Index ETF (NASDAQ: TDIV ) is the top-rated Information Technology ETF and the Red Oak Technology Select Fund (MUTF: ROGSX ) is the top-rated Information Technology mutual fund. Both earn a Very Attractive rating. The ARK Web x.0 ETF (NYSEARCA: ARKW ) is the worst-rated Information Technology ETF and The Rydex Internet Fund (MUTF: RYINX ) is the worst-rated Information Technology mutual fund. ARKW earns a Dangerous rating and RYINX earns a Very Dangerous rating. 527 stocks of the 3000+ we cover are classified as Information Technology stocks. Cisco Systems, Inc. (NASDAQ: CSCO ), a previous Stock Pick of the Week, is one of our favorite stocks held by TDIV and earns our Very Attractive rating. Since 2005, Cisco has grown after-tax profit ( NOPAT ) by 6% compounded annually. Cisco earns a top-quintile return on invested capital ( ROIC ) of 16% and has steadily become a free cash flow machine, generating $9.5 billion on a trailing-twelve month (TTM) basis. Fears of Cisco’s demise in a new age of technology have long kept the stock undervalued. At its current price of ~$28/share, Cisco has a price to economic book value ( PEBV ) of 0.9. This ratio implies the market expects Cisco’s profits to permanently decline by 10%. However, if Cisco can grow NOPAT by 5% compounded annually over the next decade , the stock is worth $36/share – a 28% upside. Proofpoint Inc. (NASDAQ: PFPT ) is one of our least favorite stocks held by ARKW and earns our Dangerous rating. Proofpoint is similar to many of our recent Danger Zone picks in that it touts high revenue growth but negative profits. From 2012-2014, Proofpoint grew revenue by 23% compounded annually. On the other hand, NOPAT declined from -$19 million to -$47 million. On a TTM basis, which includes 1Q15 results, NOPAT has fallen to -$52 million. Proofpoint’s pre-tax (NOPBT) margins are -26% and the company currently earns a bottom-quintile ROIC of -53%. The stock price has benefited from the hype surrounding cyber security companies and is now significantly overvalued. To justify its current price of $63/share, Proofpoint must immediately achieve 6% NOPBT margins (similar to peer Fortinet (NASDAQ: FTNT )) and grow revenues by 30% compounded annually for the next 16 years . If you want to be in a stock that benefits from the growth in cyber security, we recommend this recent stock pick of the week. Figures 3 and 4 show the rating landscape of all Information Technology 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.

Low P/E Stock Of The Day No. 5: Calpine Corporation

Summary The company is trading at TTM P/E of 8.8x. Environmentally operations mean that the company will face less regulatory issues. Increase in EPS is the result of favorable macro-conditions, increasing the Commodity Margin. In this series I will select a low P/E stock to analyze. I define low P/E as anywhere from 5x to 10x, as any lower and we may be looking at special situations. Calpine Corporation (NYSE: CPN ) is a U.S. power producer. The company primarily operates natural gas-fired and geothermal power plants and sells wholesale energy to corporate customers. Natural gas-fired generators use gas as fuel to power turbines while geothermal powered generators harness energy from hot water below Earth’s surface. At the end of 2014, the company had 88 plants in total. After beating its second quarter earnings, share shot up 10%. But the company is still trading at a TTM P/E ratio of 8.8x, well within our selection criteria. Let’s explore further and see if there may be an opportunity. The Business While the company generates power from renewable sources (geothermal) as well as fossil fuel (natural gas), the two methods share the common characteristic of being environmentally friendly. How geothermal energy is good for the environment is self-explanatory, but it may surprise you that natural gas is actually one of the cleanest fossil fuel options for electricity generation, emissions are virtually zero. Why is this important? In an increasingly stringent regulatory environment, non-environmentally friendly power generating methods (e.g. coal) are facing some tough challenges . This means that Calpine will not face similar legal issues in the future, decreasing the risk for shareholders. Making Sense Of The Numbers As evident by the above chart, revenue has been increasing since FYE 2012. However, this is not attributed to a larger turnover (i.e. electricity generation), as power generated did not vary much from year to year. The company generated 112 MMWh of power in 2012, 102 MMWh in 2013, and 100 MMWh in 2014. As you can see, the amount of power generated actually decreased, yet revenue still went up. This is possible because the price that the company gets per MWh fluctuates. This is called the Commodity Margin and it is impacted by a plethora of factors such as price of natural gas, economic growth, and environmental regulation. In a sense, this risk can be compared to the commodity risk faced by all energy producing companies. For the last couple of years, the company has benefited from favorable macro-factors (e.g. falling natural gas prices) that allowed it to increase its Commodity Margin. What does this mean? This means that earnings can be quite volatile. From the chart below we can see that both the operating margin and the EPS swings wildly from year to year. Conclusion The company does not face imminent challenges from regulators and should be around for a long time, but its financial results do not share the same outlook. The surge in EPS that the company experienced over the past couple of years can be largely attributed to extrinsic factors. This is the risk that you must be willing to bear if you want to invest in a wholesale power company. While favorable macro-environment factors will benefit the company (as they have done so for the past three years), the company cannot generate predictable earnings in the future, meaning that the low P/E ratio today does not necessarily translate to a cheap stock. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.