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3 Strong Buy All-Cap Value Mutual Funds

Value mutual funds provide excellent choices for investors looking for bargains, i.e., stocks at a discount. Value mutual funds are those that invest in stocks trading at discounts to book value, and have low price-to-earnings ratio and high dividend yields. Value investing is always a popular strategy, and for a good reason. After all, who doesn’t want to find stocks that have low P/Es, solid outlooks and decent dividends? However, not all value funds solely comprise companies that primarily use their earnings to pay dividends. Investors interested in choosing value funds for yield should be sure to check the mutual fund yield. The mutual fund yield is the dividend payment divided by the value of the mutual fund’s shares. Below we share with you three top-rated all-cap value mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. Investors can click here to see the complete list of all-cap value funds, their Zacks Rank and past performance. DFA Tax Managed U.S. Marketwide Value II (MUTF: DFMVX ) seeks long-term growth of capital. DFMVX invests 100% of its assets in its Master Fund, The Tax-Managed U.S. Marketwide Value Series. The Master fund is expected to invest the lion’s share of its assets in companies located in the U.S. DFA Tax-Managed US Marketwide Value II has a three-year annualized return of almost 9.1%. DFMVX has an expense ratio of 0.22% as compared to the category average of 1.10%. Pioneer Core Equity Fund A (MUTF: PIOTX ) invests the majority of its assets in equity securities of U.S. companies. PIOTX may invest a maximum of 10% of its assets in securities of non-U.S. issuers, which include up to 5% of its assets in securities of emerging economies. The fund may also invest in initial public offerings of equity securities. Pioneer Value A has a three-year annualized return of almost 6.3%. Craig Sterling is one of the fund managers of PIOTX since last year. Homestead Funds Value (MUTF: HOVLX ) seeks capital appreciation over the long run. HOVLX primarily focuses on acquiring common stocks of undervalued companies with market capitalization higher than or equal to $2 billion. The fund considers factors including earnings valuations and debt ratios to identify undervalued companies. Homestead Value has a three-year annualized return of almost 9.9%. As of December 2015, HOVLX held 48 issues, with 5.47% of its assets invested in Bristol-Myers Squibb Company (NYSE: BMY ). Original Post

Gamable EPS And Share Buybacks

EPS (Earnings per Share) is a corporate metric that is often pursued by the corporate managers and executives to increase their own payouts, and confused by investors for a signal of company health. As is well known (and we show this in our Risk & Resilience course), EPS is a “gamable” metric – in other words, it can be easily manipulated by companies, often at the expense of actual balance sheet quality. And I have written about this problem here on the blog for ages now. So, here is a fresh chart from the Deutsche Bank Research (via @bySamRo) detailing share buybacks’ (repurchases) contribution to EPS growth: In basic terms, there is no organic EPS growth (from net income) over the last 7 quarters, on average, and there is negative EPS growth from organic sources over the last 4 consecutive quarters. As noted in my lecture on the subject of “EPS gaming”, there are some market-structure reasons for this development (basically, rise of tech-based services in the economy): Click to enlarge Source of Data: McKinsey Click to enlarge Source: McKinsey However, as the chart above shows, share buybacks simply do not add any value to the total returns to shareholders (TRS), and that is before we consider a shift in current buybacks trends toward debt-funded repurchases. So, in a sense, current buybacks are rising leverage risks without increasing TRS. Which is brutally ugly for companies’ balance sheets, and given debt covenants, is also bad news for future capex funding capacity.

Best And Worst Q2’16: Information Technology ETFs, Mutual Funds And Key Holdings

The Information Technology sector ranks fourth out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Information Technology sector ranked third. It gets our Neutral rating, which is based on aggregation of ratings of 29 ETFs and 122 mutual funds in the Information Technology sector as of April 18, 2016. See a recap of our Q1’16 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 25 to 384). 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 Five mutual funds are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The Van Eck Market Vectors Semiconductor ETF (NYSEARCA: SMH ) is the top-rated Information Technology ETF and the Fidelity Select Communications Equipment Portfolio (MUTF: FSDCX ) is the top-rated Information Technology mutual fund. Both earn a Very Attractive rating. The First Trust Dow Jones Internet Index Fund (NYSEARCA: FDN ) is the worst rated Information Technology ETF and the Invesco Technology Sector Fund (MUTF: IFOAX ) is the worst rated Information Technology mutual fund. FDN earns a Dangerous rating and IFOAX earns a Very Dangerous rating. 506 stocks of the 3000+ we cover are classified as Information Technology stocks. Cisco Systems (NASDAQ: CSCO ) is one of our favorite stocks held by FSDCX and earns a Very Attractive rating. Over the past decade, Cisco has grown after-tax profits ( NOPAT ) by 7% compounded annually. Cisco has improved its return on invested capital ( ROIC ) from 14% in 2005 to a top-quintile 17% in 2015. The company has generated a cumulative $32 billion in free cash flow ( FCF ) over the past five fiscal years. However, in spite of the operational strength exhibited by Cisco, CSCO is undervalued and presents an excellent buying opportunity. At its current price of $28/share, Cisco has a price-to-economic book value ( PEBV ) ratio of 0.8. This ratio means that the market expects Cisco’s NOPAT to permanently decline by 20%. If Cisco can grow NOPAT by just 6% compounded annually for the next decade , the stock is worth $43/share today – a 54% upside. ServiceNow (NYSE: NOW ) remains one of our least favorite stocks held by IFOAX and earns a Dangerous rating. ServiceNow was placed in the Danger Zone in December 2015. Since going public in 2012, ServiceNow’s NOPAT has declined from -$29 million to -$154 million while its ROIC declined from -29% to -41% over the same time frame. The drastic decline in profits and profitability is in stark contrast to ServiceNow’s revenue growth, as the company adopted a “grow revenue at all costs strategy,” which clearly ignores profits. Making matters worse, when we placed NOW in the Danger Zone, its valuation implied significant profit growth and despite NOW falling 21% since the publish date of our report, those expectations remain unrealistically high. To justify its current price of $63/share, ServiceNow must grow immediately achieve 15% pre-tax margins (-15% in 2015) and grow revenue by 23% compounded annually for 13 years . In this scenario, 13 years from now, ServiceNow would be generating over $14 billion in revenue, slightly below Facebook’s (NASDAQ: FB ) 2015 revenue. It’s clear how the expectations embedded in NOW remain overly optimistic. 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 Kyle Guske II 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. 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.