Best And Worst Q4’15: Consumer Discretionary ETFs, Mutual Funds And Key Holdings

By | October 20, 2015

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Summary The Consumer Discretionary sector ranks fourth in Q4’15. Based on an aggregation of ratings of 17 ETFs and 20 mutual funds. RTH is our top-rated Consumer Discretionary ETF and FSRPX is our top-rated Consumer Discretionary mutual fund. The Consumer Discretionary sector ranks fourth out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. It gets our Neutral rating, which is based on aggregation of ratings of 17 ETFs and 20 mutual funds in the Consumer Discretionary sector. See a recap of our Q3’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Consumer Discretionary sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 391). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Discretionary sector should buy the one Attractive rated ETF in Figure 1. 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 The PowerShares Dynamic Retail Portfolio ETF (NYSEARCA: PMR ) and the U.S. Global Jets ETF (NYSEARCA: JETS ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. 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 Rydex Retailing Fund ( RYRIX , RYRAX ) and the Rydex Leisure Fund ( RYLIX , RYLAX ) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The Market Vectors Retail ETF (NYSEARCA: RTH ) is the top-rated Consumer Discretionary ETF and the Fidelity Select Retailing Portfolio (MUTF: FSRPX ) is the top-rated Consumer Discretionary mutual fund. RTH earns our Attractive rating and FSRPX earns our Neutral rating. The SPDR Homebuilders ETF (NYSEARCA: XHB ) is the worst-rated Consumer Discretionary ETF and the Rydex Series Leisure Fund (MUTF: RYLSX ) is the worst-rated Consumer Discretionary mutual fund. XHB earns our Neutral rating and RYLSX earns our Dangerous rating. 450 stocks of the 3000+ we cover are classified as Consumer Discretionary stocks. Twenty-First Century Fox, Inc. (NASDAQ: FOXA ) is one of our favorite stocks held by Consumer Discretionary ETFs and mutual funds and earns our Very Attractive rating. Over the past five years, Twenty-First Century Fox has grown its after-tax operating profit ( NOPAT ) by 5% compounded annually. Twenty-First Century Fox’s return on invested capital ( ROIC ) has risen to 10% from 8% over this same timeframe. Though content creators will always be in demand in the television/movie industry, fears about the future of television viewership have left FOXA undervalued. At its current price of $29/share, FOXA has a price to economic book value ( PEBV ) ratio of 0.9. This ratio implies that Twenty-First Century Fox’s NOPAT will permanently decline by 10%. However, if Twenty-First Century Fox can grow NOPAT by just 5% compounded annually for the next 5 years , the stock today is worth $41/share, a 41% upside. KB Home (NYSE: KBH ) is one of our least favorite stocks held by Consumer Discretionary ETFs and mutual funds and was recently featured as a Danger Zone stock . It earns our Very Dangerous rating. KB Home’s problems are twofold; declining market share/profits and overpriced shares. Despite the housing market improving since 2011, KB Home’s economic earnings have only gotten worse over this time. However, because GAAP net income does not account for off-balance sheet liabilities and equity capital, KB Home has been able to report growing GAAP EPS. The disconnect between GAAP EPS and economic earnings has left KBH overvalued. To justify its current price of $14/share KB Home’s must grow NOPAT by 18% compounded annually for 13 years . This expectation is rather optimistic given KB Home’s inability to participate in the housing recovery over the past few years, which, as we detail in our Danger Zone report, will not likely continue for much longer. Figures 3 and 4 show the rating landscape of all Consumer Discretionary 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 Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector or theme. Scalper1 News

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