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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.

Best Performing Energy Mutual Funds Of Q2 2015

Despite crude prices rebounding in March this year and trending up before hitting a roadblock again this month, energy prices were nonetheless far short of their year-ago levels. Nevertheless, the energy sector enjoyed improving fundamentals in the second quarter. The U.S. Energy Department’s weekly inventory had shown that crude stockpiles continued to fall and continued to set new records. The federal government’s EIA report had also revealed that crude inventories were down. However, this could not translate into significant gains for energy mutual funds in the second quarter. According to Morningstar, in the 3-month period, energy sector mutual funds lost 3.8%. Of the 200 funds under the study, only 39 funds could finish in the green. The highest gain reached just 2.9% and the average gain for these 39 funds is 0.6%. Compared to the average loss for the remaining 161 funds of -2%. The biggest loss of -5.5% came from US Global Investors Global Res (MUTF: PSPFX ), which currently holds a Zacks Mutual Fund Rank #5 (Strong Sell). (Note: This number includes the same funds of different classes) Weakness in energy is also prominent in earnings projections. Per the Earnings Trends, the second quarter earnings for the Oil/Energy sector may slump 61% on 39.3% lower revenues. The earnings analysis pertains to the S&P 500 index. Moreover, it was also a tough quarter for the broader markets. The Dow was the only benchmark in the first quarter to end in the red, but the S&P 500 joined the blue-chip index in negative territory in the second quarter. Just 41% of mutual funds could manage to finish in the green in the second quarter. This is less than half of the 81% gains scored by mutual funds in the first quarter. Crude Price Slump Again The downtrend is again creating jitters. In mid-July, the crude had the steepest one-day fall in over three months. West Texas Intermediate (WTI) crude had plunged 8.4%. This was the largest one-day percentage decline since February. Now, the Iran deal is a major headwind. After 20 months of negotiations, a nuclear deal has been reached between Iran and six world powers. The agreement is meant to restrict Iran from manufacturing nuclear weapons in exchange of removing economic sanctions – which also include constraining crude oil export from Tehran. But the big question that arises is how the nuclear accord might impact the oil market. However, it will take Iran months or more to ramp up its production to previous levels. Moreover, it will take around two months for the U.S. to get congressional approval for the nuclear pact, indicating that the sanctions won’t be removed immediately. Top 10 Energy Funds of Q2 2015 Below we present the top 10 Energy funds with best returns of Q2 2015: (click to enlarge) Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded. Q2 % Rank vs Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst. As already discussed, the Q2 gains are really muted. However, these 10 funds could at least reverse the losing trend for the overall energy category. Gains of the bottom 3 here, Baron Energy and Resources Retail (MUTF: BENFX ), Putnam Global Natural Resources A (MUTF: EBERX ) and JPMorgan Glob Natural Resources A, are below 0.2%. Here, BENFX and EBERX carry a Zacks Mutual Fund Rank #1 (Strong Buy). Both these funds have a healthy average EPS growth. Joining them in this category of promising average EPS growth are Invesco Energy A (MUTF: IENAX ) and RS Global Natural Resources A (MUTF: RSNRX ). While IENAX carries a Zacks Mutual Fund Rank #2 (Buy), RSNRX carries a Zacks Mutual Fund Rank #3 (Hold) . The other Strong-Buy rank funds in the list are Fidelity Select Materials (MUTF: FSDPX ) and Fidelity Adv Materials A (MUTF: FMFAX ). While both these funds from the Fidelity family has a Strong Buy rank, the top gainer in second quarter Fidelity Select Energy Svcs (MUTF: FSESX ) holds a Zacks Mutual Fund Rank #4 (Sell). Going forward, energy funds will surely be looking to rebound. A downtrend in crude prices helps companies involved in the downstream (refining and marketing). The business of the downstream players is negatively correlated with crude prices. Also, Master Limited Partnerships (MLPs) offered considerable returns at significantly lower risk. Most MLPs are involved in processing and transportation of energy commodities such as natural gas, crude oil, and refined products, under long-term contracts. Original Post