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

By | February 22, 2016

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The Utilities sector ranks last out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Utilities sector ranked fifth. It gets our Dangerous rating, which is based on aggregation of ratings of nine ETFs and 34 mutual funds in the Utilities sector. See a recap of our Q4’15 Sector Ratings here . Figure 1 ranks from best to worst eight Utilities ETFs and Figure 2 shows the five best and worst-rated Utilities mutual funds. Not all Utilities sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 255). This variation creates drastically different investment implications and, therefore, ratings. Investors should not buy any Utilities ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off. 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 The Fidelity MSCI Utilities Index ETF (NYSEARCA: FUTY ) is the top-rated Utilities ETF and the American Century Quantitative Equity Utilities Fund (MUTF: BULIX ) is the top-rated Utilities mutual fund. Both earn a Neutral rating. The Guggenheim S&P 500 Equal Weight Utilities ETF (NYSEARCA: RYU ) is the worst-rated Utilities ETF and the ICON Utilities Fund (MUTF: ICTVX ) is the worst-rated Utilities mutual fund. RYU earns a Dangerous rating and ICTVX earns a Very Dangerous rating. 79 stocks of the 3000+ we cover are classified as Utilities stocks, but due to style drift, Utilities ETFs and mutual funds hold 255 stocks. PPL Corporation (NYSE: PPL ) is one of our favorite stocks held by Utilities ETFs and mutual funds. It is the only Utility stock that earns an Attractive rating. Since 1998, PPL has grown after-tax profits ( NOPAT ) by 10% compounded annually. Over this timeframe, PPL has improved its return on invested capital ( ROIC ) from 6% to 7%, which is the highest ROIC of all 79 Utilities stocks under coverage. Despite the continued strength of PPL’s business, the stock is only up 6% over the past decade and shares are currently undervalued. At its current price of $36/share, PPL has a price to economic book value ( PEBV ) ratio of 0.6. This ratio means that the market expects PPL’s NOPAT to permanently decline by 40% from its current levels. If PPL can grow NOPAT by just 3% compounded annually for the next decade , the stock is worth $59/share today – a 64% upside. Connecticut Water Service (NASDAQ: CTWS ) is one of our least favorite stocks held by Utilities ETFs and mutual funds and earns a Very Dangerous rating. Throughout the history of our model, which dates back to 1998, Connecticut Water Service has never generated positive economic earnings . The company’s ROIC has declined from 5% to 3% over the same timeframe. However, at its current price of $41/share the stock remains significantly overvalued. To justify its current price, Connecticut Water Service must grow NOPAT by 7% compounded annually for the next nine years . While this may not seem like much in terms of profit growth, keep in mind that CTWS has failed to generate economic profits in any year for nearly two decades. Figures 3 and 4 show the rating landscape of all Utilities 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. Scalper1 News

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