Tag Archives: mutual funds

Adding A Defense To A Value And Momentum Offense

By DailyAlts Staff The concept of combining value and momentum investing to create more durable equity portfolios has really caught on as of late, with recent coverage from Barron’s and a white paper from Research Affiliates extolling the virtues of the combined strategy. Meb Faber of Cambria Investment Management has also chimed in with a paper of his own : “Learning to Play Offense and Defense: Combining Value and Momentum from the Bottom up, and the Top Down.” Mr. Faber’s view is that value and momentum can be combined for offense, but even more care needs to be taken on the defensive end of investing. The Importance of Defense Mr. Faber relays a story from his high-school football days to express the importance of defensive investing. To rally the defensive unit, Mr. Faber’s old football coach would tell the players that nobody ever lost a game by a score of 0 to 0 – thus, if the defense did it’s very best, the odds of the team losing were practically nil. The same can be said of investing, where protection against drawdowns of 50% or more is probably more than “half the game.” Offensive Playbook That said, no one ever won a game with a score of 0 to 0 either, so in order to have investment success, your portfolio is going to need to “score some points.” Mr. Faber favors a combined value/momentum approach, since the two styles have been proven to add value over time, and they have the added benefit of being inversely correlated. Put simply, the value/momentum offensive playbook consists of two rules: Invest in cheap stocks (value) Invest in stocks that are going up (momentum) Offensive Methodology How should one measure a stock’s “cheapness” or select an appropriate time frame for determining bullish price momentum? The details aren’t all that important, in Mr. Faber’s view, since cheap stocks are likely to be cheap by most or all sensible measures, and the same can be said of the bullish price momentum of good candidates for the momentum half of the playbook. Nevertheless, Mr. Faber’s own methodology for determining cheapness involves price-to-earnings and price-to-book ratios, as well as EBIT (earnings before interest and taxes) divided by total enterprise value (market cap plus debt.) His momentum methodology looks at price movements over the past three, six, and twelve months. From there, the top 100 qualifying value and momentum stocks are added to a portfolio and rebalanced every three months. This combined “VAMO” (value + momentum) portfolio has outperformed the S&P 500 by a significant margin since 1964. Defensive Strategy Despite VAMO’s dramatic besting of the S&P 500 over the past half-century, the strategy did suffer a larger maximum drawdown of 56.05%, compared to the S&P 500’s worst of 50.95%. If you have the capital and temperament of Warren Buffett or his partner Charlie Munger, these drawdowns are just good opportunities to add to positions, but for most of the rest of us, big selloffs like we saw in 2008 can be stress-inducing and cause us to sell at the worst possible times. That’s why Mr. Faber prefers combining VAMO with a defensive strategy designed to mitigate those maximum drawdowns. Its two-rule playbook is simple: Don’t invest in stocks when the broad market is expensive Don’t invest in stocks when the broad market is going down Conditions for rule #1 are satisfied when the broad market’s P/E ratio is in the top 20% of its historic valuation range. Rule #2 is in effect whenever the S&P 500 is trading beneath its long-term moving average. When either set of conditions are apparent, the “VAMO Hedge” strategy initiates a short position in the S&P 500 equal to half of the VAMO portfolio’s size. When both conditions are met, then the VAMO Hedge strategy becomes “market neutral,” with shorts on the S&P 500 equal in size to the VAMO portfolio’s long holdings. The results? A surprisingly lower annualized return, but a much smaller maximum drawdown combined with lower volatility, and therefore a superior Sharpe ratio. If you have the stomach of Warren Buffett and Charlie Munger, perhaps you can do without this hedge. Otherwise, combining value and momentum with Mr. Faber’s hedging strategy appears to be a prudent means of maintaining market exposure while protecting against downside risk.

Best And Worst Q4’15: Consumer Staples ETFs, Mutual Funds And Key Holdings

Summary The Consumer Staples sector ranks first in Q4’15. Based on an aggregation of ratings of 10 ETFs and 8 mutual funds.. FSTA is our top-rated Consumer Staples ETF and VCSAX is our top-rated Consumer Staples mutual fund.. The Consumer Staples sector ranks first out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. It gets our Attractive rating, which is based on aggregation of ratings of 10 ETFs and eight mutual funds in the Consumer Staples sector. See a recap of our Q3’15 Sector Ratings here . Figure 1 ranks from best to worst the nine Consumer Staples ETFs that meet our liquidity standards and Figure 2 ranks from best to worst all eight Consumer Staples mutual funds. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 16 to 114). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Staples sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. It is rare that two of the worst ETFs in this sector hold enough quality stocks to earn an Attractive-or-better rating. 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 ProShares Ultra Consumer Goods ETF (NYSEARCA: UGE ) 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 Fidelity MSCI Consumer Staples Index ETF (NYSEARCA: FSTA ) is the top-rated Consumer Staples ETF and the Vanguard World Funds: Consumer Staples Index (MUTF: VCSAX ) is the top-rated Consumer Staples mutual fund. FSTA earns a Very Attractive rating and VCSAX earns an Attractive rating. The PowerShares S&P SmallCap Consumer Staples Portfolio ETF (NASDAQ: PSCC ) is the worst-rated Consumer Staples ETF and the ICON Consumer Staples Fund (MUTF: ICRAX ) is the worst-rated Consumer Staples mutual fund. PSCC earns a Neutral rating and ICRAX earns a Very Dangerous rating 112 stocks of the 3000+ we cover are classified as Consumer Staples stocks. Cal-Maine Foods (NASDAQ: CALM ) is one of our favorite stocks held by Consumer Staples ETFs and mutual funds and was previously a Stock Pick of the Week . It earns a Very Attractive rating. Since 1998, Cal-Maine has grown after-tax profit ( NOPAT ) by an impressive 20% compounded annually. Over this same timeframe, Cal-Maine’s return on invested capital ( ROIC ) has improved from 5% to its current top quintile 45%. Despite nearly two decades of excellent business operations, CALM is priced for significant profit decline. At its current price of $61/share, CALM has a price to economic book value ( PEBV ) ratio of 0.7. This ratio implies that the market expects the company’s profits to permanently decline by 30%. If Cal-Maine can grow NOPAT by just 8% compounded annually over the next decade , the stock is worth $76/share today – a 25% upside. Seneca Foods Corp (NASDAQ: SENEA ) is one of our least favorite stocks held by Consumer Staples ETFs and mutual funds and earns a Dangerous rating. Since 2012, the company has been unable to grow profits, as NOPAT has declined by 25% compounded annually. Making matters worse, Seneca’s ROIC fell to a bottom quintile -2% from 8% over this same timeframe. Despite the deteriorating business fundamentals, SENEA remains priced for significant profit growth moving forward. To justify its current price of $26/share, Seneca must grow NOPAT by 11% compounded annually for the next 20 years . Investors would be wise to stay away from overvalued stocks like SENEA. Figures 3 and 4 show the rating landscape of all Consumer Staples 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 Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector or theme.

Can Bank Earnings Boost Finance Mutual Funds?

The third-quarter earnings season will heat up this week, but we already have major reports from the banking sector. Last week the earnings releases were largely dominated by the Finance behemoths. Industry challenges and a strained global environment were among the headwinds that the banks needed to overcome. In fact, achieving high revenue growth was a challenge on a strong U.S. dollar and macroeconomic concerns. The Finance sector has already seen how some primes, namely J.P. Morgan (NYSE: JPM ), Wells Fargo (NYSE: WFC ) and Bank of America (NYSE: BAC ), fared in the quarter. Citigroup (NYSE: C ), U.S. Bancorp (NYSE: USB ) and The PNC Financial Services Group (NYSE: PNC ) have also released their results. Earnings will continue to dominate headlines over some of the next trading days. The Bank of New York Mellon (NYSE: BK ), Fifth Third Bancorp (NASDAQ: FITB ) and Regions Financial (NYSE: RF ) are slated to announce results today; while Capital One (NYSE: COF ) will report on Oct 22. Indication from the finance sector is relatively more positive than certain other sectors. As the banking sector sees such active releases, it will be a prudent move to focus on Finance mutual funds as well. Finance Sector Earnings Including the morning reports as of Oct 19, 63 S&P 500 members had reported results. These account for 18.6% of the index’s total market capitalization. Total earnings for these companies are up 1% from the same period last year on 0.9% lower revenues. While 61.9% beat EPS estimates the revenue beat ratio was 28.6%. The earnings numbers are weaker than the same group of companies’ results in recent seasons. However, it was the banking behemoth Bank of America that aided the growth numbers. Easy comparisons helped the positive earnings growth, but excluding the Finance sector earnings growth dipped to negative 7.4%. Till last week, 5.9% of companies from the Finance sector that count for 24.9% of the total market cap had reported results. Earnings growth compared favorably with broader trends at 31.9% with 80% beating EPS estimates. Revenues were however down 1.9% and revenue beat ratio was 40%. Recap of the Major Banks’ Results Revenues continue to be weak as the equity market rout and the low rate environment prevail. Demand for loans remained subdued, while provision for loan losses continued to rise mainly due to lower reserve releases and increased provision for energy sector loans. However, absence of significant legal expenses, coupled with cost-control initiatives (reorganization and streamlining), helped most banks to surpass their respective EPS estimates. But, the estimates were themselves conservative after a number of downward revisions. Below we present a synopsis of earnings results from some of the behemoths: JPMorgan Chase & Co missed the Zacks Consensus Estimate though estimates were revised lower in recent days. It reported adjusted earnings of $1.32 per share, delivering a negative surprise of 4.4%. Weak trading activities primarily led to a decline in the overall profit. Citigroup beat earnings estimates by 1.6%, primarily on the back of lower legal and repositioning costs. As expected, pressure on revenues owing to a fall in fixed income market revenues was the major undermining factor. Bank of America comfortably beat the earnings estimate. Weakness in fixed income trading and lower equity investment income were the undermining factors. Lower operating expenses and negligible legal costs raised BofA’s earnings to 37 cents per share, beating the Zacks Consensus Estimate of 34 cents. Wells Fargo was able to overcome industry challenges, with its results being driven by revenue growth (up 3.3% year over year). The company’s earnings of $1.05 per share beat the Zacks Consensus Estimate by a penny. Results benefited from organic growth aided by strong loans and deposit balances. Bank Mutual Funds in Focus Going forward, the Finance sector is expected to see earnings growth of 9.6% on 3.7% lower revenues. These compare favorably with the second quarter actual numbers. In the second quarter, earnings for the Finance sector had improved 7.2% on revenue decline of 14.2%. The Finance sector is placed third, after Autos and Transportation sectors, in terms of best earnings growth forecast. On that note, let’s look at Finance mutual funds that significant exposure to banks. The favorably ranked mutual funds may offer potential investment opportunities for investors interested in the sector. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. The Fidelity Select Banking Portfolio (MUTF: FSRBX ) seeks growth of capital. It invests a large share of its assets in banking companies. FSRBX invests in both domestic and non-U.S. issuers using fundamental analysis. Fidelity Select Banking Portfolio currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) . Top holdings of FSRBX include Wells Fargo, U.S. Bancorp, Bank of America, JP Morgan and Citigroup. It has average EPS growth of 10.3%. Though down 1.4% year to date, FSRBX has returned 10% over the 1-year period and its 3- and 5-year annualized returns are 13.9% and 13%, respectively. The Emerald Banking and Finance Fund A (MUTF: HSSAX ) primarily seeks long-term growth through capital appreciation. Income is a secondary objective. HSSAX generally invests at least 80% of its net assets in common stocks. Emerald Banking and Finance’s managers limit the fund investment to 50 companies and the fund invests primarily in U.S.-based companies. Emerald Banking and Finance A currently carries a Zacks Mutual Fund Rank #2 (Buy). Top holdings of HSSAX include Bank of the Ozarks (NASDAQ: OZRK ), SVB Financial (NASDAQ: SIVB ), Signature Bank (NASDAQ: SBNY ) and Opus Bank (NASDAQ: OPB ). It has average EPS growth of 15.3%. While the year-to-date and 1-year returns are 11.5% and 20.7%, respectively, the respective 3- and 5-year annualized returns are 20.5% and 17.2%. The ProFunds Banks UltraSector Fund Investor (MUTF: BKPIX ) seeks daily results (excluding fees and expenses) that is one and half times of the Dow Jones U.S. Banks Index’ daily performance. This index is a measure of the performance of the U.S. banking sector. The ProFunds Banks UltraSector Investor currently carries a Zacks Mutual Fund Rank #2. Top holdings of BKPIX include Wells Fargo, U.S. Bancorp, Bank of America, JP Morgan and Citigroup. It has average EPS growth of 6.7%. Though down by 6% year to date, BKPIX has returned 12% over the 1-year period and its 3- and 5-year annualized returns are 20.5% and 13.6%, respectively. Link to the original post on Zacks.com