Author Archives: Scalper1

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

The Financials sector ranks seventh out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Financials sector ranked sixth. It gets our Dangerous rating, which is based on an aggregation of ratings of 41 ETFs and 244 mutual funds in the Financials 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 Financials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 22 to 572). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Financials 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 Four ETFs are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. See our ETF screener for more details. 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 US Insurance ETF (NYSEARCA: IAK ) is the top-rated Financials ETF and the Davis Financial Fund (MUTF: DVFYX ) is the top-rated Financials mutual fund. Both earn a Very Attractive rating. The PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA: KBWY ) is the worst-rated Financials ETF and the Rydex Series Real Estate Fund (MUTF: RYREX ) is the worst-rated Financials mutual fund. Both earn a Very Dangerous rating. 602 stocks of the 3000+ we cover are classified as Financials stocks. The Progressive Corp (NYSE: PGR ) is one of our favorite stocks held by IAK and earns a Very Attractive rating. PGR also lands on January’s Most Attractive Stocks list. Since 2009, Progressive has grown after-tax profit ( NOPAT ) by 5% compounded annually. Over this same time frame, Progressive’s return on invested capital ( ROIC ) never fell below 17% and is currently a top quintile 19%. The strength in Progressive’s business helps explain why the stock was up over 17% in 2015, but even after this price increase shares remain undervalued. At its current price of $31/share, Progressive has a price to economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Progressive’s NOPAT to never meaningfully grow from its current levels. If Progressive can grow NOPAT by just 5% compounded annually (similar to past five years) for the next five years , the stock is worth $39/share today – a 26% upside. Prologis (NYSE: PLD ) is one of our least favorite stocks held by RYREX and earns a Dangerous rating. On the surface, Prologis would appear to be a healthy business that has grown GAAP net income by 181% compounded annually since 2010. However, this net income growth fails to account for the expansion of the balance sheet to fund the GAAP growth. In fact, Prologis’ debt has increased from $3.6 billion to $10.4 billion since 2010 and in total, Prologis’ invested capital has grown from $7 billion to $25 billion over the past five years. Increasing invested capital does not come free of charge and after removing the cost for Prologis’ invested capital we find that Prologis has only earned positive economic earnings in one of the past 17 years (2005). Despite its long-term track record of value destruction, PLD is priced for significant profit growth going forward. To justify its current price of $41/share, PLD must grow NOPAT by 10% compounded annually for the next 12 years . This expectation seems highly optimistic given PLD’s history of value destruction. Figures 3 and 4 show the rating landscape of all Financials 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.

Alibaba Invests Big In Magic Leap, A Move Beyond Virtual Reality

The current art of virtual reality looks like a kid’s toy compared to technology by Magic Leap, which has just received nearly $800 million in a funding round led by Alibaba ( BABA ). The Florida-based company has not revealed the technology used to create its stunning video images, such as a whale leaping out of nowhere and splash landing on a high-school auditorium floor. “Absolutely not VR,” said a Magic Leap spokesman in an email exchange with IBD. “We are developing Mixed Reality.” In an interview with the  Financial Times , Magic Leap co-founder and CEO Rony Abovitz, described the technology as a new kind of “hyper-personal computing” that seamlessly mixes rich digital graphics with the physical world. In the newest funding round, totaling $793.5 million, investors besides Alibaba include the venture capital arm of Qualcomm ( QCOM ) and Alphabet ( GOOGL ), through its Google unit, as well as Warner Bros. and Fidelity Management, among others. “We invest in forward-thinking innovative companies like Magic Leap that are developing leading products and technologies,” Joe Tsai, executive vice chairman at Alibaba, said in a statement announcing the funding round. “We believe Alibaba can both provide support and learn from such a partner.” Google, before it became a unit of Alphabet, was a prior investor in Magic Leap. It led a $542 million funding round in Magic Leap in October 2014. Qualcomm was also an investor. The latest investment by Alibaba, Google and others comes as Facebook ( FB ) is betting big on its Oculus Rift virtual reality headset. Facebook priced the headset at $600 and is expected to begin shipping next month. In an interview with The Wall Street Journal in 2014, Abovitz said he sees Magic Leap as a new interface that could replace the PC monitors and smartphone screens that define the modern era of computing. The article said the first product in development by Magic Leaps “is a mobile and wearable device for the eyes, with the hardware and software designed by Magic Leap.” At its core, said the article, Magic Leap’s technology can project images onto the eyes, making it possible to see virtual 3-D objects as if they were part of the real world. Abovitz told the WSJ that it tricks the mind into believing that virtual objects are actually part of the physical space. In announcing the new funding round, Abovitz said “we are creating a new world where digital and physical realities seamlessly blend together to enable amazing new experience.”

European Union Deal Lifts Amazon, Google, Facebook From Legal Limbo

Tech giants Amazon ( AMZN ), Alphabet ( GOOGL ) and Facebook ( FB ) were lifted from legal limbo Tuesday when the U.S. and European Union agreed to a key deal to continue allowing data transfers across the Atlantic. The 11th-hour deal, creating the EU-US Privacy Shield, replaces the Safe Harbor accord, which came under scrutiny in 2013 after former National Security Agency contractor Edward Snowden alleged mass surveillance by the U.S. government. But even as companies lauded the deal, European privacy advocates deemed the proposed framework too flimsy, with one calling for U.S. legislation limiting European surveillance in place of a mere “scout’s honor.” U.S. Mass Surveillance Limited In October, the European Court of Justice struck down the 15-year-old Safe Harbor agreement. The court said it inadequately protected the region’s 500 million citizens from U.S. surveillance. Privacy laws are more stringent in Europe, where privacy is considered a basic human right and the “right to be forgotten” has been codified. Austrian graduate student Max Schrems brought the original suit that struck down Safe Harbor, arguing Facebook misused Europeans’ data in cooperation with the NSA’s Prism program. Facebook has denied that allegation. Facebook, Alphabet and Amazon.com didn’t respond to requests for comment about the EU-U.S. pact. Central to the new accord is  “written assurances” by the U.S. that access to European data by public authorities and law enforcement “will be subject to clear limitations, safeguards and oversight mechanisms,” according to the EU press release. An ombudsman will be established to examine European complaints of data misuse, and companies operating under the new Privacy Shield will be obliged to “commit to robust obligations on how personal data is processed.” The regulations apply to tech firms shuffling data across the ocean, as well as companies with international human resources. Per the agreement, companies must publish their commitments and will be subject to deadlines for handling European complaints. The Department of Commerce and Federal Trade Commission will oversee enforcement. The U.S. and EU will jointly review operations under the Privacy Shield on an annual basis. Andrus Ansip, vice president of the EU’s executive body, the European Commission, and Commissioner Vera Jourova have been charged with taking steps to put the pending framework in place. Both praised the agreement, which came a day after a deadline set by European protection authorities . “Our people can be sure that their data is fully protected,” Ansip said in the press release issued by the E.C. “Our businesses, especially the smallest ones, have the legal certainty they need to develop their activities across the Atlantic.” ‘Scout’s Honor’ Isn’t Enough On Tuesday, Schrems mocked the agreement as “ an exchange of letters ” from the U.S., assuring the government wouldn’t spy on European citizens, and tweeted a series of fake postcards purportedly between government officials. “With all due respect, but a couple of letters by the outgoing Obama administration is by no means a legal basis to guarantee the fundamental rights of 500 million European users in the long run, when there is explicit law allowing U.S. mass surveillance,” he said in a statement. He added: “I doubt a European can walk into a U.S. court and claim his fundamental rights based on a letter by someone.” Sophia In’t Veld, vice chairwoman of the group Alliance of Liberals and Democrats for Europe, agreed, likening the letters to a mere “ scout’s honor ” by the U.S. government. “We urgently need a thorough legal appraisal of the safeguards offered by the U.S.,” she said in a statement. “The legal status of these safeguards is very unclear.” Veld doubted the U.S. safeguards would pass muster with the Court of Justice and called it “highly implausible” that the ombudsman would have “sufficient power to oversee U.S. intelligence services.” Joe McNamee, executive director of European Digital Rights — a civil rights advocacy association — accused the E.U. of backing down from the Court of Justice’s ruling “to accept a new, badly flawed arrangement.” Still Policy Work To Do Daniel Castro, vice president of the Washington, D.C.-based Information Technology and Innovation Foundation (ITIF), said the group understood the E.U.’s concern following Snowden’s disclosures. “Abruptly revoking the Safe Harbor agreement was the wrong way the address those concerns,” he said in a statement. “We are pleased that U.S. and European policymakers have resolved this issue and support the free flow of data between these two markets.” From a policy perspective, however, there’s still work to be done, Castro said. The  Judicial Redress Act , a law proposed in the U.S. House of Representatives and favored by the ITIF, would allow a foreign citizen to sue the U.S. if the government released that person’s records without his or her consent. And also from a policy perspective, “in Europe, this means rejecting protectionist measures, such as a European Cloud, and fully embracing the spirit of a digital single market, not just in Europe, but globally,” Castro said.