Category Archives: stocks

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

The Energy sector ranks last out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Energy sector ranked ninth. It gets our Very Dangerous rating, which is based on aggregation of ratings of 22 ETFs and 100 mutual funds in the Energy 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 Energy sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 144). This variation creates drastically different investment implications and, therefore, ratings. Investors should not buy any Energy 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 Four ETFs 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 Rydex Series Energy Service Portfolio (MUTF: RYVIX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. Market Vectors Oil Services ETF (NYSEARCA: OIH ) is the top-rated Energy ETF and MainStay Cushing Renaissance Advantage Fund (MUTF: CRZZX ) is the top-rated Energy mutual fund. Both earn a Neutral rating. iShares US Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) is the worst rated Energy ETF and Saratoga Advantage Energy and Basic Materials Portfolio (MUTF: SBMBX ) is the worst rated Energy mutual fund. Both earn a Very Dangerous rating. 178 stocks of the 3000+ we cover are classified as Energy stocks. LyondellBasell Industries (NYSE: LYB ) is one of our favorite stocks held by CRZZX and earns a Very Attractive rating. Over the past five years, LYB has grown after-tax profit ( NOPAT ) by 10% compounded annually. Over the same time period, Lyondell’s return on invested capital ( ROIC ) has improved from 17% to a top-quintile 22%. Additionally, over the past four years, LYB has generated a cumulative $14.8 billion in free cash flow . Despite the strength of the business, LYB is undervalued. At its current price of $88/share, LYB has a price-to-economic book value ( PEBV ) ratio of 0.8. This ratio means that the market expects LYB’s NOPAT to permanently decline by 20% from current levels. If LYB can grow NOPAT by just 4% compounded annually for the next decade , the stock is worth $139/share today – a 58% upside. Hess Corporation (NYSE: HES ) is one of our least favorite stocks held by IEO and earns a Dangerous rating. Contrary to GAAP net income, which has fluctuated wildly over the past decade, Hess’ NOPAT has only worsened by declining from $1.7 billion in 2005 to -$859 million in 2015. Over the same time period, Hess’ ROIC has fallen from 11% to -2%. In a large disconnect from reality, HES has risen over 50% over the past three months, which has made shares more overvalued. In order to justify its current price of $57/share, Hess must immediately achieve positive pre-tax margins (from -22% in 2015) and grow revenue by 20% compounded annually for the next 20 years . In this scenario, 20 years from now Hess would be generating $254 billion in revenue, which would nearly equal oil giant Exxon’s 2015 revenue. The expectations already embedded in HES are unrealistically high. Figures 3 and 4 show the rating landscape of all Energy 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.

Google Mobile Search A Moneymaker, But Ad-Cost Hurdles Remain

Google is making more money from mobile search, as Yahoo ( YHOO ) and Microsoft ( MSFT ) ad platforms falter. But it’s not all gravy, as parent Alphabet ’s ( GOOGL ) Q1 earnings attest. The good news is that clicks on Google’s mobile search ads are rising fast. Mobile rose from 44% of all Google clicks in Q2 2015 to 57% in Q1 2016, says digital marketing firm Merkle. But mobile ad clicks continue to pay less than desktop ad clicks because consumers buy less often on smartphones. Google’s average cost of a click on one of its ads fell 9% in Q1 vs. Q1 2015. Lower-priced mobile clicks were a big factor. Google aims to drive mobile cost-per-clicks (CPCs) higher with new ad technology. There’s also the matter of traffic acquisition costs (TAC). That’s where Apple ( AAPL ) may or may not come in. Google’s overall TAC — what it pays partner websites, both desktop and mobile, in fees for carrying its ads — rose 13% in Q1, to $3.8 billion. Higher TAC shrunk Alphabet’s earnings, which missed Wall Street estimates. More alarming to analysts was that TAC paid to “distribution partners” jumped 33% to $1.22 billion. Google’s search engine is the default on most mobile devices, and it’s the default search engine for Apple’s Safari browser. There’s been speculation over whether Apple and Google will renew the Safari contract. To some analysts, the 33% jump in “distribution partner” TAC was a red flag. On the company’s Q1 earnings call last month, Alphabet CFO Ruth Porat attributed the TAC hike to general mobile trends and new advertising technology — and not to any one major contract renewal. Mobile TAC is higher than desktop TAC, Porat said. But analysts wonder. “I certainly can’t rule out a higher Safari TAC rate tied to a renewal,” Mark Ballard, senior research director at Merkle, told IBD. “There are so many moving pieces here, and Google and Apple have been very tight-lipped about their dealings over the years. “It very well could be a combination of higher Safari traffic share and TAC rate. (But) Google has made some moves in the past few quarters to significantly ramp up the monetization of its mobile results. This additional revenue may be coming at a higher TAC.” Google Ad Contracts ‘Have Potentially Changed’ Ballard notes that Google in late 2015 added a third ad atop mobile-search results. Growing use of product listing ads (PLAs) in mobile phone search results may be another factor. Google’s Q2 earnings in July could provide more evidence either way. “We think the terms of (Google’s) contracts have potentially changed and could be another driving factor of the growing TAC,” Evan Wilson, a Pacific Crest analyst, said in a research report. “At this point, we’ve modeled (TAC) increases to be gradual and not a significant new headwind. “We’re going to keep a close eye on news of a potential new Apple deal, as this would be a primary suspect to further fuel this dynamic.” The big picture, though, is that if TAC rises sharply, it would be a problem for Google’s profitability, whether or not Apple is directly involved. At RBC Capital, analyst Mark Mahaney wrote in a research note: “We view the Q1 TAC trends as one of the clear negatives of the quarter. That 8.5% TAC rate for Google Sites is a material step up. We wonder whether a renegotiated Apple contract had anything to do with this. (But) we are modeling modest growth in TAC going forward.” Documents released in January in the ongoing Google- Oracle ( ORCL ) court battle revealed that Google paid Apple $1 billion in 2014 to make its search engine No. 1 on Safari. TAC payments, though, are separate, analysts say. Goldman Sachs, in a 2015 research report, estimated that 75% of Google’s mobile search revenue came from iOS users (iPhone and tablet), and half of that was related to Safari. Goldman Sachs estimated that 65% of ad revenue went to Apple, while Google kept 35%.