Author Archives: Scalper1

How To Find The Best Style Mutual Funds: Q1’16

Finding the best mutual funds 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 Mutual Fund Labels There are at least 929 different Large Cap Value mutual funds and at least 6296 mutual funds across twelve styles. Do investors need 524+ choices on average per style? How different can the mutual funds be? Those 929 Large Cap Value mutual funds are very different. With anywhere from eight to 741 holdings, many of these Large Cap Value mutual funds have drastically different portfolios, creating drastically different investment implications. The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Blend ranks first for stock selection. Small Cap Growth ranks last. Details on the Best & Worst mutual funds in each style are here . A Recipe for Paralysis By Analysis I think the large number of Large Cap Value (or any other) style mutual funds 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 mutual funds. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 741 stocks, and sometimes even more, for one mutual fund. Any investor focused on fulfilling fiduciary duties recognizes that analyzing the holdings of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each style. Figure 1: The Best Mutual Fund in Each Style Click to enlarge Sources: New Constructs, LLC and company filings The Barrow Value Opportunity Fund (MUTF: BALIX ) ranks first, the Brown Advisory Equity Income Fund (MUTF: BAFDX ) ranks second, and the Wall Street Fund (MUTF: WALLX ) ranks third. The Artisan Mid Cap Value Fund (MUTF: APHQX ) ranks last. How To Avoid “The Danger Within” Why do you need to know the holdings of mutual funds before you buy? You need to be sure you do not buy a fund that might blow up. Buying a fund 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 mutual fund’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter. PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND If Only Investors Could Find Funds Rated by Their Holdings… The Vulcan Value Partners Fund (MUTF: VVPLX ) is the top-rated Large Cap Blend mutual fund and the overall top-rated fund of the 6296 style mutual funds that we cover. The mutual funds in Figure 1 all receive an Attractive-or-better rating. However, with so few assets in some of the funds, it is clear investors haven’t identified these quality funds. Disclosure: 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.

One Item In Red Hat’s Q4 Earnings That Blew The Surprise

Despite a fourth-quarter earnings report that flew past estimates, Red Hat ( RHT ) stock fell Wednesday as analysts raised concerns of an unexpected slowdown. The line item that spooked investors was a slowing in customer billings and confusion about future revenue. “The fourth quarter was a mixed bag, with signs that fundamentals remain strong with large deals, but also billings deceleration and a lack of margin expansion for fiscal 2017,” wrote Pacific Crest Securities analyst Ben McFadden. Red Hat stock was down more than 5%, below 72, in morning trading on the stock market today . Shares had touched a 15-month low below 60 last month after hitting a 16-year high above 84 in December. Red Hat is the leading provider of Linux-based software that businesses use to run operations. Revenue comes from subscriptions that customers pay for software support, training and integration services in using the open-source version of its Linux operating system. Red Hat reported fiscal Q4 earnings after the market close Tuesday for the quarter that ended Feb. 29. Revenue rose 17% to $544 million, or 21% in constant currency, year over year. Earnings per share minus items jumped 21% to 52 cents, the fourth quarter in a row of double-digit gains. Both beat Wall Street estimates. First-quarter revenue guidance also beat, though EPS only met expectations. “Growth of reported billings and deferred revenue were not very good relative to expectations,” BMO Capital Markets analyst Keith Bachman wrote in a research note. “Red Hat’s quarter had something for both bulls and bears.” For the past seven quarters, deferred revenue grew by an average of 20% year over year. In fiscal Q4, it rose 17.6%. Billings rose 13%, compared with the average of 19% in the prior three quarters, Bachman wrote. He maintained an outperform rating on Red Hat stock but lowered his price target to 88 from 90, based on concerns about lower billings and cash flow. RBC Capital Markets maintained an outperform rating on Red Hat with a price target of 95. Needham kept a buy rating and price target of 98. Red Hat has made a strategic shift to cloud computing, a fast-growing tech field dominated by Amazon.com ( AMZN ) , Microsoft ( MSFT ) and Alphabet ( GOOGL ). In November, Red Hat announced a partnership with Microsoft, which made Red Hat software available on Microsoft’s Azure cloud platform. Amazon is being watched by analysts in light of its Amazon Web Services stepping up Linux offerings, in competition with Red Hat.

Bracketology – An Investing Lesson From The NCAA

“Bracketology,” a term coined by ESPN, is the study of the annual NCAA college basketball tournament. Interestingly the art or science of filling out an NCAA tournament bracket also provides insight into how investors select investment assets. Before explaining, we present you with a question: When filling out an NCAA bracket do you A) start by picking the expected national champion and work backward or B) analyze each matchup, and pick winners starting at the earliest rounds, working toward the championship game? In A, one has a pre-determined idea for which team is the best in the country and disregards the path that team must take to become champions. Those using B’s methodology look at each game and consider the participants, compare their respective records, their strengths of schedule, demonstrated strengths and weaknesses, record against common opponents and even how travel and geography could affect performance. In a methodical, rigorous evaluation, the result is a conclusion about which team can win 6 consecutive games and become the national champion. Outcome vs Process Outcome-based investors start with an expected outcome, typically based on prior results, and select assets accordingly. How many times do we hear the gurus of Wall Street preach that stocks return 7% on average and therefore a well-diversified portfolio should expect the same thing this year? Many investors take the bait and few question the rather simple approach that drives the expected outcome and ultimately the investment selection process. Process-based investing, on the other hand, is a tactic to better determine how assets should perform. The method may be based on macroeconomic expectations, technical analysis or a bottom-up assessment of individual companies to name a few. Process investors do not just assume that yesterday’s winners will be tomorrow’s winners nor do they diversify just for the sake of diversification. They create a procedure to help them forecast which assets are likely to provide the best risk/reward prospects and deploy capital opportunistically. “The past is no guarantee of future results” is a common investment disclaimer. However, it is this same outcome-based methodology that many investment managers use to allocate their assets. Process driven investors employ thoughtful analysis to determine what investments should perform the best. Potential outcomes are the ending point of their analysis not the starting point of their work. A or B? So, why would people use a less rigorous process in investing than the one they use in filling out their NCAA tournament brackets? Starting at the final game and selecting a national champion, is similar to identifying a return goal of, for example, 10%. How that goal is achieved is subordinated to the idea that one will achieve it. In such an outcome based approach, decision making is predicated on an expected result. Considering each of the 67 possible match-ups in the NCAA tournament to ultimately determine the winner applies a process-oriented approach. Each decision is based on the evaluation of comparative strengths and weaknesses between teams. The expected outcome is a result of the analysis of factors required to achieve the outcome. Summary Very few filling out brackets this year will pick Duke solely because they won the tournament last year. Many investors, however, will select investments based on what performed well last year. The following table (courtesy invest-assist.blogspot.com and Koch Capital) is a great reminder that building a portfolio based on last year’s performance is a surefire way to ensure you are not making the most out of your portfolio. Click to enlarge Winning or losing a basketball pool has benefits like bragging rights and potentially winning some money. Managing a client’s investments deserves much more thoughtfulness. Those who apply a well thought out process-oriented approach provide their clients a much more rigorous, durable and time-tested method to consistent performance. 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.