Tag Archives: power

Best And Worst Q1’16: Energy ETFs, Mutual Funds And Key Holdings

The Energy sector ranks ninth out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Energy sector ranked last. It gets our Dangerous rating, which is based on aggregation of ratings of 23 ETFs and 112 mutual funds in the Energy sector. See a recap of our Q4’15 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 153). 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 Van Eck Market Vectors Uranium+Nuclear Energy ETF (NYSEARCA: NLR ), the PowerShares Dynamic Oil & Gas Services Portfolio (NYSEARCA: PXJ ), and the Van Eck Market Vectors Unconventional Oil & Gas ETF (NYSEARCA: FRAK ) 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 Van Eck 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 an Attractive rating and FSESX earns a Neutral rating. The First Trust ISE Water Index Fund (NYSEARCA: FIW ) is the worst-rated Energy ETF and the Saratoga Advantage Energy and Basic Materials Portfolio (MUTF: SBMBX ) is the worst-rated Energy mutual fund. FIW earns a Dangerous rating and SBMBX earns a Very Dangerous rating. 184 stocks of the 3000+ we cover are classified as Energy stocks. The FMC Technologies (NYSE: FTI ) is one of our favorite stocks held by OIH and earns an Attractive rating. While the Energy market has certainly had its issues over the past two years, FMC Technologies business has continued to exhibit strength. Over the past five years, FMC has grown after-tax profit ( NOPAT ) by 9% compounded annually. The company currently earns a return on invested capital ( ROIC ) of 12%. Best of all, FMC has earned positive economic earnings every year since 2006. Despite the above, FTI declined over 37% in 2015. Now, at its current price of $25/share, FTI has a price to economic book value ( PEBV ) ratio of 0.8. This ratio means that the market expects FMC’s NOPAT to permanently decline by 20% over its remaining corporate life. If FMC can grow NOPAT by just 2% compounded annually for the next decade , the stock is worth $31/share today – a 24% upside. The Diamondback Energy (NASDAQ: FANG ) is one of our least favorite stocks held by SBMBX and earns a Dangerous rating. Despite reporting impressive revenue growth, Diamondback Energy’s business is in decline. The company’s economic earnings have declined from -$32 million in 2012 to -$331 million over the trailing twelve months. Diamondback’s ROIC has fallen from 3% to -2% over the same timeframe. Despite the deterioration of the business, FANG was up 12% in 2015, which has left shares highly overvalued. To justify its current price of $58/share, Diamondback must grow NOPAT by 12% compounded annually for the next 18 years . When contrasted with Diamondback’s short history of value destruction, this expectation appears overly 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 Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

Reducing Volatility While Staying In The Stock Market With USMV

During February, we think investors should consider iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ). In ranking approximately 860 equity ETFs, we combine holdings-level analysis with ETF-level attributes, such as bid/ask spread, expense ratio and volatility. According to Sam Stovall, US equity strategist for S&P Capital IQ, since 1946, there have been 56 pullbacks, or price declines of 5.0%-9.99%. They fell an average of 7% over a little more than one month and took fewer than two months to get back to breakeven. There have been 20 corrections (-10.0% to -19.9%) since WWII, erasing an average 14% from the value of the S&P 500. They typically took a bit more than four months to go from peak to trough and a similar number of months to recover fully. We think USMV is strong ETF for consideration for investors wanting to reduce the risk considerations of their overall U.S. equity exposure. We expect the market to remain volatile in February due in part to sluggish earnings and modest economic prospects, but we look to the S&P 500 index to end 2016 much higher than where it is currently trading. As such believe this ETF allows investors to stay fully invested while reducing the risk profile of their overall portfolio. Now is a good time, according to S&P Capital IQ, to look at low-volatility strategies. Yet it is important to understand how USMV is constructed. The ETF is diversified across all 10 sectors, but holds the least volatile securities within the sector. iShares, working with an MSCI benchmark, uses sector bands (+/- 500 basis points relative to a parent MSCI index at the semi-annual rebalance). As such, at year end, financials (22% of assets), health care (20%), information technology (15%) and consumer staples (15%) are the largest sectors. Relative to the parent MSCI index, tech is underweighted, while the other three are overweighted. Other sectors underweighted are industrials (4.5%) and energy (1.9%). From a sector perspective, USMV is different than its peer from PowerShares. That ETF has no sector bands and as such has more in financials (27% of assets) and less in tech (2%). USMV ranks favorably to S&P Capital IQ for all four risk consideration inputs to our ranking. Three of these, S&P Capital IQ Quality Rankings and Qualitative Risk Assessments, along with Standard & Poor’s Credit Ratings, are tied to the holdings. The relatively low risk of these holdings are well suited, we think, in the current choppy market. For example, Johnson & Johnson (NYSE: JNJ ) has an A+ Quality Ranking, a low risk assessment and AAA credit rating. S&P Capital IQ equity analyst Jeff Loo, who has a buy recommendation on the shares, view its capital deployment strategy of acquisitions and stock buybacks positively. In October 2015, JNJ announced a $10 billion stock buyback, and the shares currently have a 3% dividend yield. S&P Capital IQ sees earnings per share growing to $6.50 in 2016 and $6.82 in 2017, driven by pharma growth and restructuring efforts. Meanwhile, McDonald’s (NYSE: MCD ) has an A Quality Ranking, a medium risk assessment and BBB+ credit rating. S&P Capital IQ equity analyst Tuna Amobi, who has a buy recommendation on the shares, noted MCD reaffirmed its capital allocation initiatives after relatively encouraging Q4 results — including a 5% increase in global comparable sales — amid early positive signs on its multi-year turnaround strategy. After last year’s sweeping organizational changes Amobi sees further gradual progress on the turnaround initiatives, including an accelerated pace of global refranchising. S&P Capital IQ sees earnings per share in 2016 rising to $5.39 due to operating margin expansion and share repurchases. In addition, USMV earns a favorable ranking input for its below-average three-year standard deviation of 9.1 (ETFs tracking the S&P 500 index have 10.5). Daniel Gamba, managing director and head of BlackRock’s iShares Americas Institutional Business, told S&P Capital IQ in late January that the increased volatility in equity markets has made institutional investors more tactical in using minimum volatility products to lower risk. We think the increased usage of USMV by institutional investors has been a positive for all investors. The average daily trading volume in the past month spiked to 3.3 million, up from 2.0 million during the past six months. The bid/ask spread is $0.01, lower than most ETFs. In addition from a cost perspective, USMV has a modest 0.15% expense ratio. Year to date through January 27, USMV declined only 3.8%, falling less than half as much as the S&P 500 index. In 2015, during a relatively flat year with the broader index up 1.4%, USMV rose 5.5%. We like USMV based on its underlying holdings and from a cost/liquidity perspective. However, should the market volatility diminish quickly and equities to climb higher, this and other lower-risk strategies are prone to underperform in our opinion. Additional disclosure: http://t.co/AHwSBhyHHt