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Best And Worst Q2’16: Consumer Discretionary ETFs, Mutual Funds And Key Holdings

The Consumer Discretionary sector ranks fifth out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Consumer Discretionary sector ranked fifth as well. It gets our Neutral rating, which is based on aggregation of ratings of 13 ETFs and 19 mutual funds in the Consumer Discretionary sector. See a recap of our Q1’16 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 389). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Discretionary 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 PowerShares Dynamic Retail Portfolio (NYSEARCA: PMR ), PowerShares S&P SmallCap Consumer Discretionary Portfolio (NASDAQ: PSCD ), and Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (NYSEARCA: RCD ) 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 ICON Consumer Discretionary Fund (MUTF: ICCCX ), Rydex Series 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. PowerShares Dynamic Leisure & Entertainment Portfolio (NYSEARCA: PEJ ) is the top-rated Consumer Discretionary ETF and Fidelity Select Leisure Portfolio (MUTF: FDLSX ) is the top-rated Consumer Discretionary mutual fund. PEJ earns a Very Attractive rating and FDLSX earns an Attractive rating. SPDR S&P Retail ETF (NYSEARCA: XRT ) is the worst rated Consumer Discretionary ETF and Rydex Series Retailing Fund (MUTF: RYRTX ) is the worst-rated Consumer Discretionary mutual fund. XRT earns a Neutral rating and RYRTX earns a Very Dangerous rating. 451 stocks of the 3000+ we cover are classified as Consumer Discretionary stocks. Carnival Corporation (NYSE: CCL ) is one of our favorite stocks held by PEJ and earns an Attractive rating. Since 1998, Carnival has grown after-tax profit ( NOPAT ) by 6% compounded annually. The company currently earns a 7% return on invested capital ( ROIC ), which is improved from the 4% earned in 2013. Over the past five years, Carnival has generated a cumulative $8 billion in free cash flow ( FCF ). Best of all, CCL is currently undervalued. At its current price of $49/share, CCL has a price-to-economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Carnival’s NOPAT to never meaningfully grow from current levels. If Carnival can grow NOPAT by just 4% compounded annually for the next decade , the stock is worth $68/share today – a 39% upside. Amazon.com (NASDAQ: AMZN ) remains one of our least favorite stocks held by RYRTX and earns a Dangerous rating. Over the past decade, Amazon’s economic earnings have declined from $242 million to -$508 million. The company’s ROIC has declined from 27% in 2005 to 6% in 2015, which represents a clear sign that Amazon’s low margin, grow at all costs business strategy has been an inefficient use of capital. Worst of all, the expectations baked in AMZN already imply the company will be wildly profitable. To justify the current stock price of $667/share, AMZN must grow NOPAT by 22% compounded annually for the next 20 years . In this scenario, 20 years from now, Amazon would be generating over $8 trillion in revenue. Such expectations seem irrationally exuberant and make AMZN one to avoid. 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 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.

Zendesk Gains Traction In Enterprise As Q1 Revenue Beats

Zendesk ( Z ) stock jumped after the provider of customer-support software to retailers reported a smaller-than-expected Q1 loss and raised its full-year 2016 revenue guidance. Zendesk stock was up more than 8% in early trading in the stock market today , near 25, and breaking out of a cup-with-handle base at a 23.87 buy point in heavy volume. San Francisco-based Zendesk said it lost 8 cents per share minus items, vs. analysts’ estimate of a 10-cent per-share loss. Revenue rose 62% to $68.5 million, topping views of $66 million. “Zendesk finished Q4 with over 75,600 customer accounts, up from 69,000 last quarter, representing a record 6,600 customer additions,” said Pacific Crest analyst Brendan Barnicle in a research report late Tuesday. “As a result, customer acquisition costs and return on acquisition costs improved in Q1 over Q4.” For 2016, Zendesk forecast revenue  of $302.5 million at the midpoint of its guidance range, which would be up 45%, and is $7.5 million above its earlier guidance of $295 million. Zendesk provides a cloud-based customer service software platform. In November, it announced a partnership with Microsoft ( MSFT ). Zendesk competes with Salesforce.com ( CRM ), Freshdesk and Desk.com. Zendesk is gaining traction in the enterprise market, says Bhavan Suri, an analyst at William Blair. “Zendesk signed 50% more deals with average contract value of more than $50,000, and the average deal size for these transactions increased 30% year-over-year — a clear indication of the company’s success in the enterprise market,” Suri wrote in a research report. However, Zendesk has only a so-so IBD Composite Rating of 64 out of a possible 99. IBD’s Computer-Software Enterprise group ranks just No. 126 out of 197 groups. Zendesk’s stock had plunged on Feb. 5 amid a broad sell-off in tech stocks amid concern over China’s slowdown, tech spending and falling oil prices.

IBD 50: Ligand Pharma Beats Q1 Estimates, Buys Device Royalties

Ligand Pharmaceuticals ( LGND ), an  IBD 50 stock, rose early Wednesday after the small biopharma beat Q1 estimates and announced an acquisition that helped lift its guidance. Ligand reported earnings  excluding one-time items of 97 cents a share, more than triple the year-earlier number, beating analysts’ consensus by 30 cents, according to Thomson Reuters. Revenue rose 103% to $29.6 million, topping consensus by about $3 million. As described in a recent IBD  New America  story, Ligand’s business model is based on developing or acquiring technologies used in drug development and partnering with larger biotechs and pharmas that can make them into commercial products. Much of the growth in Q1 revenue came from the timing of milestone payments, along with the January acquisition of Open Monoclonal Technology, which licenses its biotech platform to drug developers. Ligand’s royalty payments grew thanks to the continued ramp of Amgen ’s ( AMGN ) blood-cancer drug Kyprolis and Novartis ’ ( NVS ) low-platelet treatment Promacta. Ligand also said it had agreed to pay $17.5 million for royalties on multiple programs from CorMatrix Cardiovascular, a privately held company that sells devices that help regrow human tissue. Ligand is guaranteed a minimum payment of $2.75 million annually, but says this is expected to double over time as CorMatrix rolls out new products. “CorMatrix’s existing and pipeline medical devices address market opportunities estimated to exceed $1 billion annually,” Ligand said in its press release . Ligand added $2 million to its 2016 revenue guidance, of which $1 million was expected to come from CorMatrix, bringing the range to $115 million to $119 million. That was still on the low side of Wall Street’s average estimate of $118.5 million, but EPS guidance beat Wall Street, at $3.41 to $3.46. Last year, the company made $3.37 a share on $71.9 million in revenue. It also guided 2017 slightly below consensus, with $160 million and EPS of $5.03. Ligand stock was up 2% in early trading on the stock market today , near 122. The stock is No. 18 on the current IBD 50 list of top-performing names over the past 12 months, with a strong Composite Rating of 93 despite somewhat light trading volume.