Author Archives: Scalper1

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.

Federal Dig Snags Lam’s KLA Buy; Will China Cry Antitrust?

Chinese, Japanese and South Korean regulators could gum up Lam Research ‘s ( LRCX ) attempt to buy KLA-Tencor ( KLAC ) by following in the footsteps of the U.S. Department of Justice, which is asking for more information on the proposed merger, an analyst said Monday. Late Friday, the companies said the DOJ had sent a “second request,” digging deeper into Lam Research’s $10.6 billion plan to acquire KLA-Tencor. Only 2%-4% of merger proposals get a second request, Semiconductor Advisors president Robert Maire says. Of those, he says about a third go through as planned but the other two-thirds either get challenged by the DOJ or get a consent decree, which is approval with conditions. In the Lam-KLA deal, the likely concerns revolve around antitrust. Together, the companies would be close to matching the market cap of  Applied Materials ( AMAT ), which is No. 2 among makers of chip manufacturing equipment, behind ASML ( ASML ). Also, together they could pressure etch pricing for major players like Intel ( INTC ) and Taiwan Semiconductor Manufacturing ( TSM ), the latter an Apple ( AAPL ) supplier. Tokyo Electron and Hitachi ( HTHIY ), which compete against Lam in etch, might oppose having KLA continuing to inspect their tools and processes. “While not good news, a second request is certainly not a death sentence for the merger, but at the very least (it) means more time and money and scrutiny to get approval,” Maire wrote in a research note. The 30-day clock for DOJ approval has now been reset. ‘Kitchen Sink Of Information’ In midday trading on the stock market today , Lam Research and KLA-Tencor stocks were down nearly 2% and 1.4%, respectively, both near three-month lows. IBD’s 34-company Electronic Semiconductor-Equipment industry group was down a small fraction midday Monday. Maire says the DOJ could “ask for the kitchen sink of information.” “The (second request) is not just a simple test of overlapping product lines,” he wrote. “It looks at things like market concentration and anti-competitive issues. (Lam-KLA) would certainly have a large concentration of the overall market.” The chip industry is most concerned about KLA’s standing as an “impartial arbiter” of others’ tools, he says. “Will Lam dep and etch tools get an unfair advantage? An early look at results? A more complete look?” Maire asked. “(It’s) kind of a lot like insider trading.” Lam and KLA already have the go-ahead from Germany, Ireland, Israel and Taiwan, but they still needs a slew of other foreign approvals. This DOJ action can “snowball into a problem” if it becomes too costly, Maire says. Applied Materials and Tokyo Electron called off their merger in the face of strong regulator scrutiny. DRAM Slowdown Hits Lam The request further delays the merger’s close, Needham analyst Y. Edwin Mok noted in a research report, saying he expects the deal to close in Q4, as opposed to the companies’ target for Q3. Western Digital ( WDC ) closed its $19 billion SanDisk acquisition last week, a merger that was announced within hours of the Lam-KLA match-up. Neither Mok nor Cowen analyst Timothy Arcuri worry about the Lam-KLA deal getting approval, however. In his report, Arcuri called the second request “more procedural in nature.” “There is no overlap here, and certain big customers have been pushing these companies together for several years, especially around the issue of yield ramp in 3D,” he wrote. “We continue to see the deal closing in (the) August time frame.” Arcuri cut his price target on Lam stock to 85 from 93. Lam and rival ASML recently indicated minor timing delays for DRAM (dynamic random-access memory)-related shipments, he wrote. Lam has guided shipments up for the second half of the year, but Arcuri isn’t that confident. “Weakness for Lam seems focused on the memory side, with some signs of a less aggressive 3D Nand (flash) shipment cadence to Toshiba, seemingly due more to capital constraints at this customer rather than any fundamental change in the 3D Nand ramp itself,” he wrote. But Samsung, SK Hynix, Micron ( MU ) and Intel Dalian haven’t experienced any mirrored slowdown, he wrote.

Netflix Gets Vote Of Confidence From RBC Amid Heightened Skepticism

Internet television network Netflix ( NFLX ) has lost 18% of its value since reporting Q1 earnings and offering weak subscriber guidance for Q2. But RBC analyst Mark Mahaney says concerns about Netflix’s prospects are overblown. In a research report Sunday, Mahaney reiterated his outperform rating on Netflix stock, with a price target of 140. Netflix stock was up more than 2%, near 90, in morning trading on the stock market today . Shares have been falling, though, and it’s on IBD Swing Trader as a short-sale possibility. On Friday, Dan Nathan, founder of RiskReversal.com, told CNBC that options volume has grown increasingly bearish on Netflix, pointing to negative sentiment on Wall Street. Netflix has an IBD Accumulation/Distribution Rating of D+, indicating more institutional selling than buying. But the market’s concerns about Netflix’s profitability, international growth and competition are “overstated,” Mahaney said. “We still think NFLX can double in three years.” Netflix has proven profitability, a universal value proposition, material scale advantages and an excellent management team, Mahaney said. Netflix handily beat subscriber goals in the first quarter, but its target for new international subscribers in Q2 of 2 million was almost 1 million below Wall Street estimates. In the U.S., Netflix expects to add just 500,000 new subscribers as price hikes kick in for existing subscribers, increasing member churn. Meanwhile, Netflix is facing increased competition at home and abroad. In the U.S., Amazon.com ( AMZN ) and Hulu are ramping up their original and exclusive content offerings. In the U.K., the BBC is working on an online streaming service with the working name “Britflix” that would compete with the likes of Netflix, according to media reports. RELATED: Netflix Stock Gets Belated Price-Target Cut From UBS 5 Key Takeaways From Netflix’s Troubling Q1 Earnings Report Amazon Goes Head-To-Head With Netflix In Streaming Video