Author Archives: Scalper1

How To Find The Best Sector ETFs: Q4’15

Summary The large number of ETFs hurts investors more than it helps as too many options become paralyzing. Performance of an ETFs holdings are equal to the performance of an ETF. Our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of their holdings. Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust ETF Labels There are at least 44 different Financials ETFs and at least 196 ETFs across all sectors. Do investors need 19+ choices on average per sector? How different can the ETFs be? Those Financials ETFs are very different. With anywhere from 24 to 561 holdings, many of these Financials ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first for stock selection. Energy ranks last. Details on the Best & Worst ETFs in each sector are here . A Recipe for Paralysis By Analysis We firmly believe ETFs for a given sector should not all be that different. We think the large number of Financials (or any other) sector ETFs hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, that can be as many as 561 stocks, and sometimes even more, for one ETF. Any investor worth his salt recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top rated ETF for each sector. Figure 1: The Best ETF in Each Sector (click to enlarge) Sources: New Constructs, LLC and company filings How to Avoid “The Danger Within” Why do you need to know the holdings of ETFs before you buy? You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad. Don’t just take my word for it; see what Barron’s says on this matter. PERFORMANCE OF ETF’S HOLDINGS = PERFORMANCE OF ETF If Only Investors Could Find Funds Rated by Their Holdings The PowerShares KBW Property & Casualty Insurance Portfolio ETF (NYSEARCA: KBWP ) is the top-rated Financials ETF and the overall best ETF of the 196 sector ETFs that we cover. The worst ETF in Figure 1 is the Fidelity Covington MSCI Utilities Index (NYSEARCA: FUTY ), which gets a Dangerous rating. One would think ETF providers could do better for this sector. Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector, or theme.

Valuation Dashboard: Technology – Update

Summary Four key factors are reported across industries in the technology and telecom sectors. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow a certain number of fundamental factors for every sector to compare them to historical averages. This article covers technology and telecommunications. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research by reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Four industry factors calculated by portfolio123 are extracted from the database: price/earnings (P/E), price to sales (P/S), price to free cash flow (P/FCF), and return on equity (ROE). They are compared with their own historical averages ” Avg .” The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name. For example, D-P/E = (AvgP/E – P/E)/AvgP/E. It can be interpreted as a percentage in underpricing relative to a historical baseline: the higher, the better. It points to overpricing when negative. ROE is already a percentage. A relative variation makes little sense. That’s why we take the simple difference: D-ROE = ROE – AvgROE. The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. Industry valuation table on 12/8/2015 The next table reports the four industry factors. For each factor, the next “Avg” column gives its average between January 2001 and October 2015. It excludes the dot-com bubble and may be taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are three columns for each ratio. P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE Internet 59.55 38.33 -55.36% 3.58 2.93 -22.18% 34.55 29.72 -16.25% -24.54 -26.83 2.29 IT Services 27.53 23.34 -17.95% 1.54 1.16 -32.76% 20.69 18.68 -10.76% 10.25 2.42 7.83 Software 42.9 33.79 -26.96% 4.17 2.81 -48.40% 35.12 23.95 -46.64% -10.77 -8.17 -2.6 Communications Equipment 33.73 28.48 -18.43% 1.42 1.61 11.80% 24.56 24.1 -1.91% -2.79 -9.61 6.82 Computers & Peripherals 20.86 24.67 15.44% 1.26 1.24 -1.61% 20.87 21.68 3.74% -12.67 -8.33 -4.34 Electronic Equipment 21.54 21.26 -1.32% 1.29 1.3 0.77% 22.54 21.35 -5.57% 1.27 -1.77 3.04 Semiconductors* 29.16 31.77 8.22% 2.43 2.41 -0.83% 31.92 28.86 -10.60% 1.47 -1.34 2.81 Diversified Telecom Services 24.42 19.95 -22.41% 1.64 1.2 -36.67% 26.64 23.83 -11.79% 0.93 -11.97 12.9 Wireless Telecom Services 21.01 27.57 23.79% 1.04 1.75 40.57% 46.5 31 -50.00% 3.22 -14.25 17.47 * Averages since 2003 Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality (ROE) Relative Momentum The next chart compares the price action of the Technology Select Sector SPDR ETF ( XLK ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion XLK has outperformed SPY by about 5% in the last three months. On this period, the five best performing S&P 500 tech/telecom stocks are Autodesk (NASDAQ: ADSK ), Activision Blizzard (NASDAQ: ATVI ), KLA-Tencor (NASDAQ: KLAC ), Nvidia (NASDAQ: NVDA ) and SanDisk (NASDAQ: SNDK ). ADSK and ATVI have hit an all-time high recently. IT services, software, computers and peripherals have improved their valuation factors since last month. Electronic equipment and semiconductors look good, with fair valuation factors and a quality factor above the historical average. Wireless telecom services also are above their average quality, and two valuation factors out of three point to underpricing. The software industry looks like the weakest one from a fundamental point of view, with all metrics in negative territory. However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in technology beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “follow” tab at the top of this article.