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Is It Worth Investing In China? 3 Mutual Fund Picks

Slowdown in the manufacturing sector and the export business taking a hit are compelling China to turn into a consumer driven economy. This phase of transition is expected to be painful. But for patient investors, the returns are expected to be encouraging if they choose to remain invested in the service sector over the long run. While the service sector was on an expansionary mode in February, retail sales registered double-digit growth during the first two months of this year. China’s regulatory measures, on the other hand, raised hopes of a much stable economy. Hence, it will be prudent to invest in China focused mutual funds that have significant exposure to the service sector. GDP Slows Down, Foreign Trade Hit Badly China’s GDP came in at 6.9% last year, the lowest in almost a decade. The International Monetary Fund has trimmed China’s economic growth to 6.3% this year. China’s economy continued to be weighed down by sluggish demand at home and abroad. China’s trade surplus narrowed to $32.6 billion in February from January’s all-time high of $63.3 billion. Exports in February tanked 25.4% from last year’s figure, while imports including oil, iron ore and copper nosedived 11.2%. Even though this fall is partly due to the Lunar New Year holidays that fell in February, the overall trend is downward. In January, both exports and imports had declined by 11.2% and 18.8%, respectively. Moreover, in 2015, China’s foreign trade shrank by 8% from 2014. Manufacturing Slows Down China has mostly been a manufacturing hub. But of late, its manufacturing sector is slowing down. The official manufacturing Purchasing Managers’ Index (PMI) came in at 49.0 in February, lower than January’s reading of 49.4. In fact, China’s factory activities contracted for the seventh straight month in February. The Caixin manufacturing PMI also came in at 48 in February, a five-month low. Manufacturing was hit mostly by the beleaguered construction sector, which generally boosts demand for industrial products. Major funds such as Oberweis China Opportunities (MUTF: OBCHX ), AllianzGI China Equity A (MUTF: ALQAX ) and Matthews China Investor (MUTF: MCHFX ) fell 11.8%, 8.4% and 13.1%, respectively, on a year-to-date basis, mostly due to significant exposure to the industrial sector. Service Sector Expands, Retail Sales Rise Due to weakness in the manufacturing sector, China is looking to shift its focus to the service and consumption based sector. The official services PMI came in at 52.7 in February, down from January’s figure of 53.5. Also, the Caixin services purchasing managers’ index (PMI) for February was at 51.2 compared to 52.4 in January. Even though these figures went down in February, it remained above the key figure of 50, indicating expansion in service activities. He Fan, chief economist at Caixin Insight Group said that “overall, the services sector has outperformed manufacturing industries, reflecting continued improvement in the economic structure.” Meanwhile, retail sales of consumer goods gained 10.2% on a year-over-year basis during the first two months of 2016, according to the National Bureau of Statistics (NBS). Retail sales were mostly driven by online sales. Online sales in the first two months of this year surged by 27.2% year on year to 636.1 billion yuan. 3 China-Focused Mutual Funds to Buy Given this scenario, China’s service sector remains the only bright spot, which might help its economy to navigate through troubled waters. Moreover, China’s financial market regulators’ promising moves to boost the economy such as imposing a ban on initial public offerings, restrictions on margin trading, allowing government-managed pension funds to invest in equity markets and restricting large shareholders from shorting stocks will help investors in the long run. Here we have selected three China focused mutual funds that mostly invest in the service sector, which includes retail, financials, information technology, telecommunications and healthcare. Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear. Further, these funds boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 4-week and 3-year annualized returns and carry a low expense ratio. Fidelity China Region (MUTF: FHKCX ) invests a large portion of its assets in securities of Chinese issuers. As of the last filing, Tencent Holdings Ltd. ( OTCPK:TCEHY ), China Construction Bank Corp. ( OTCPK:CICHY ) and AIA Group Ltd. ( OTCPK:AAGIY ) were the top three holdings for FHKCX. FHKCX’s 4-week and 3-year annualized returns are 10.3% and 1.4%, respectively. Annual expense ratio of 0.96% is lower than the category average of 1.76%. FHKCX has a Zacks Mutual Fund Rank #2 and has a minimum initial investment of $2,500. Matthews China Dividend Investor (MUTF: MCDFX ) invests the majority of its assets in dividend-paying equity securities of companies located in China. As of the last filing, New Oriental Education SP (NYSE: EDU ), SERCOMM and China Construction Bank Corp. were the top three holdings for MCDFX. MCDFX’s 4-week and 3-year annualized returns are 9.6% and 4.2%, respectively. Annual expense ratio of 1.19% is lower than the category average of 1.76%. MCDFX has a Zacks Mutual Fund Rank #1 and has a minimum initial investment of $2,500. ProFunds UltraChina Investor (MUTF: UGPIX ) seeks returns that correspond to two times the daily performance of the BNY Mellon China Select ADR Index. As of the last filing, Alibaba Group Holding Limited (NYSE: BABA ), China Mobile Ltd. (NYSE: CHL ) and Baidu Inc. (NASDAQ: BIDU ) were the top three holdings for UGPIX. UGPIX’s 4-week and 3-year annualized returns are 38% and 7.8%, respectively. Annual expense ratio of 0.75% is lower than the category average of 1.99%. UGPIX has a Zacks Mutual Fund Rank #1 and has a minimum initial investment of $15,000. A higher minimum investment helps the fund manager to control cash flows, which eventually helps management of assets on a regular basis. Original Post

Don’t Be Fooled By The Short Squeeze

By Alan Gula, CFA On November 18, 2015, KaloBios Pharmaceuticals Inc. ( OTCPK:KBIOQ ) announced that Martin Shkreli and a consortium of investors had acquired more than 50% of its outstanding shares. The stock, which had closed at $2.07 that day, traded above $10 the day after the announcement. The next day, shares rose above $23 and closed at $18.45. The following Monday, the stock miraculously traded for over $45 per share. In just six trading days, the market cap of KaloBios had risen from under $4 million to over $160 million. It was a blatant example of market inefficiency. But what could cause such an irrational spike? The answer is an acute “short squeeze.” A sharp rally in the price of a stock puts pressure on short sellers, who are betting the stock will fall. They may feel the need (or be forced) to close out their short sales by buying the stock. The buying pressure from this short covering causes the stock to move higher, compelling even more traders to cover their shorts. Over the past month, we’ve seen a bevy of short squeezes as the U.S. stock market has bounced along with the price of crude oil. These squeezes haven’t been as spectacular as the above example, but judging by how heavily shorted some of these stocks are, they’ve been very painful for the short sellers, nonetheless. The following table shows a few of the largest squeezes: The short interest ratio (SIR) is the number of shares sold short divided by the average daily trading volume. The average SIR for S&P 500 constituents is 3.3 times. At 9.5 times, the average SIR for these stocks is much higher – and for good reason. The risk of bankruptcy is very high for the companies on this list. Thus, they all have Standard & Poor’s credit ratings of CCC+ or lower. Two of the companies are already in selective default (SD). Others will eventually join them. Many of the stocks on this list will end up worthless. Risks notwithstanding, the short squeezes have been eye watering. Chesapeake Energy Corp. (NYSE: CHK ) shot up 208%. Linn Energy LLC (NASDAQ: LINE ) annihilated the shorts with a 398% maximum gain over the past month. In spite of these equity gains, though, many of these companies won’t have fairy tale endings. For example, the 6% bonds due 11/15/2018 for Peabody Energy Corp. (NYSE: BTU ) have rallied, but they’re still trading around $7 ($100 par). The bond market is saying that there won’t be much recovery for senior unsecured creditors, which means that equity shareholders will be left with approximately zero. The equity shareholders of the companies listed above are deluding themselves if they think the market cap reflects underlying fundamentals. It’s important to recognize that a sharp rally in a stock doesn’t necessarily signal all is well. In most cases, these stocks aren’t rising from the ashes. In fact, many of the companies with the most violent short squeezes will end up filing for bankruptcy, just as KaloBios had to do on December 30, 2015. Safe (and high-yield) investing. Original Post Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Best And Worst Q1’16: Small Cap Value ETFs, Mutual Funds And Key Holdings

The Small Cap Value style ranks eleventh out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Value style ranked tenth. It gets our Dangerous rating, which is based on aggregation of ratings of 19 ETFs and 268 mutual funds in the Small Cap Value style. See a recap of our Q4’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Small Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 13 to 1482). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Value style should buy one of the Attractive-or-better rated mutual funds from Figure 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 First Trust Mid Cap Value AlphaDEX Fund (NYSEARCA: FNK ) and the Guggenheim S&P MidCap 400 Pure Value ETF (NYSEARCA: RFV ) 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 iShares Morningstar Small-Cap Value ETF (NYSEARCA: JKL ) is the top-rated Small Cap Value ETF and the Royce Special Equity Fund (MUTF: RSEIX ) is the top-rated Small Cap Value mutual fund. JKL earns a Neutral rating and RSEIX earns a Very Attractive rating. The Guggenheim S&P SmallCap 600 Pure Value ETF (NYSEARCA: RZV ) is the worst-rated Small Cap Value ETF and The Putnam Small Cap Value Fund (MUTF: PSLAX ) is the worst-rated Small Cap Value mutual fund. RZV earns a Dangerous rating and PSLAX earns a Very Dangerous rating. Standard Motor Products (NYSE: SMP ) is one of our favorite stocks held by RSEIX and earns a Very Attractive rating. Since 2004, Standard Motor Products has grown after-tax profit ( NOPAT ) by 19% compounded annually. Over this same time, the company has greatly improved its return on invested capital ( ROIC ) from 2% in 2004 to 13% over the last twelve months. Despite this long-term success, SMP is undervalued at current prices. At its current price of $33/share, SMP has a price-to-economic book value ( PEBV ) ratio of 0.9. This ratio means that the market expects SMP’s NOPAT to permanently decline by 10%. If Standard Motor Products can grow NOPAT by just 5% compounded annually for the next decade , the stock is worth $47/share today – a 42% upside. Raven Industries (NASDAQ: RAVN ) is one of our least favorite stocks held by ARIVX and earns a Dangerous rating. From 2005 to the last twelve months, Raven Industries has failed to grow NOPAT. Over the same time, the company’s profitability has tanked, with ROIC falling from 29% to 7%. With such poor fundamentals, it should be no surprise that RAVN is down 20% over the past decade. What may surprise you though is that RAVN remains overvalued. To justify its current price, Raven Industries must grow NOPAT by 6% compounded annually for the next 21 years . This expectation seems rather optimistic given Raven’s poor track record of profit growth. Figures 3 and 4 show the rating landscape of all Small Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst 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, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.