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Best And Worst Q4’15: Mid Cap Blend ETFs, Mutual Funds And Key Holdings

Summary The Mid Cap Blend style ranks eighth in Q4’15. Based on an aggregation of ratings of 18 ETFs and 344 mutual funds. IJH is our top-rated Mid Cap Blend style ETF and LSIRX is our top-rated Mid Cap Blend style mutual fund. The Mid Cap Blend style ranks eighth out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Mid Cap Blend style ranked ninth. It gets our Dangerous rating, which is based on aggregation of ratings of 18 ETFs and 344 mutual funds in the Mid Cap Blend style. See a recap of our Q3’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Mid Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 21 to 3330). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Mid Cap Blend style 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 The ProShares S&P MidCap 400 Dividend ETF (NYSEARCA: REGL ) and the Validea Market Legends ETF (NASDAQ: VALX ) 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 Boston Trust & Walden Funds SMID Cap Fund (MUTF: BTSMX ), the Nationwide Herndon Mid Cap Value (MUTF: NWWQX ) (MUTF: NWWPX ), and the Boston Trust & Walden Funds MidCap Fund (MUTF: BTMFX ), are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The iShares Core S&P MidCap ETF (NYSEARCA: IJH ) is the top-rated Mid Cap Blend ETF and the Legg Mason Partners ClearBridge Mid Cap Core Fund (MUTF: LSIRX ) is the top-rated Mid Cap Blend mutual fund. IJH earns a Neutral rating and LSIRX earns a Very Attractive rating. The State Street SPDR Russell Small Cap Completeness ETF (NYSEARCA: RSCO ) is the worst-rated Mid Cap Blend ETF and the Satuit Capital Management US SMID Cap Fund (MUTF: SATDX ) is the worst-rated Mid Cap Blend mutual fund. RSCO earns a Neutral rating and SATDX earns a Very Dangerous rating. Cullen/Frost Bankers (NYSE: CFR ) is one of our favorite stocks held by Mid Cap Blend ETFs and mutual funds and earns our Attractive rating. Since 2010, Cullen/Frost has grown after-tax profits ( NOPAT ) by 8% compounded annually and improved its NOPAT margin from 25% to 28%. The company currently earns a return on invested capital ( ROIC ) of 9%. CFR has been beaten down 15% this year despite solid fundamentals. At its current price of $64/share, CFR has a price to economic book value ( PEBV ) ratio of 1.2. This ratio implies the market expects Cullen/Frost to grow its NOPAT by only 20% over the remainder of its corporate life. If Cullen/Frost can continue to grow NOPAT by 8% compounded annually for the next five years , the stock is worth $78/share today – a 13% upside. Cavium Inc. (NASDAQ: CAVM ) is one of our least favorite stocks held by Mid Cap Blend ETFs and mutual funds and earns our Dangerous rating. After turning a $10 million profit in 2010, Cavium’s NOPAT has fallen to -$23 million on a trailing-twelve-month basis. Cavium currently earns a bottom quintile ROIC of -7%, which is a significant decline from the 7% earned in 2010. Despite the deteriorating fundamentals, CAVM is up 15% on the year and the expectations baked into the current stock price leave shares with significant downside risk. To justify its current price of $71/share, Cavium must immediately achieve pre-tax margins of 6.5% (same margin as 2010) and grow revenue by 20% compounded annually for the next 26 years . Given the competitive semiconductor industry in which Cavium operates, it seems highly optimistic to expect double-digit revenue growth for nearly three decades. Figures 3 and 4 show the rating landscape of all Mid Cap Blend 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 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, style, or theme.

Cemig Is Worth Considering At These Levels

Summary The financial results for Q3 2015 are out, and it looks like Cemig will end the year with net income and EBITDA in line with 2014. The ttm EPS is $0.68 USD, which implies a ttm P/E ratio of 2.88 at the closing price of $1.96. The stock has been punished by investors, the main causes of concern being the continued depreciation of the brazilian real and the likelyhood of losing the concessions for 3 plants. Companhia Energética de Minas Gerais (NYSE: CIG ), also known as Cemig, is a state-controlled Brazilian power company, headquartered in Belo Horizonte, the capital state of Minas Gerais. The company operates in all three segments of the electricity market (generation, transmission and distribution), but it also has stakes in other businesses, like telecom and natural gas distribution. Year to date, Cemig’s ADRs have lost a bit over 60% in value. Some of this was of course warranted by the depreciation of the real. Aided by a strong US dollar, we’ve seen the BRL/USD pair drop 30% so far this year. CIG data by YCharts Concessions During this summer, the Superior Court of Justice in Brazil has ruled against Cemig on its hydroelectric power plants Jaguara and São Simão, whose concession contracts expired in 2013 and this year respectively. Cemig has appealed the decision at the Federal Supreme Court, which means Cemig will still be operating them until the dispute is settled. The Federal Supreme Court has recently suggested that Cemig and the Ministry of Mines and Energy come to an agreement and not try to drag this out in court: “In view of the complexity and importance of the debate raised by this case, and the need to encourage voluntary settlement within the Judiciary: Parties to state whether they have interest in holding of a conciliation hearing.” Because these assets are still under dispute, they won’t be available for bidding at the auction scheduled for November 25. However, Cemig has stated its interest to participate in this auction, where they could bid for concessions for new power plants: there will be a total of 29 operating concessions auctioned, with a total capacity surpassing 6000MW. Miranda, another power plant that has investors worried has an operation concession to Cemig which expires at the end of 2016. At the end of Q3, Cemig had an operating generating capacity of 7,759MW, and another 2,457MW under construction. This puts the worst case scenario of losing all three concessions at a 32% loss in current operating capacity, or a 24% loss of total capacity, if we include capacity under construction. Financial results In any case, it looks like Cemig will keep operating these plants until the dispute is settled, so let’s look at their current financial metrics. Note that Cemig reports earnings in Brazilian reals, which is the currency in these graphs. (click to enlarge) Although net revenue has been steady in recent years, EBITDA and net income have not, so I’ve included a moving average for the trailing four quarters, to make the results smoother. (click to enlarge) (click to enlarge) A quick glance at these graphs suggests that Cemig will probably end 2015 with about as much in earnings as it did in 2014. Actually, the net income for the first 9 months of 2015 is 2,134 mil $R, which is 5.6% higher than the 2,019 mil $R in the first 9 months of 2014. The ttm EPS is R$2.58, which, at the current exchange rate, is $0.68 USD. This implies a ttm P/E ratio of 2.88 at the closing price of $1.96. Dividend In May of this year, the company has published a notice to shareholders regarding its dividend policy: the payment of dividends specified in the by-laws, of 50% of the Net profit for the business year, would not be compatible with the present financial situation of the Company, due mainly to the low level of water in the electricity reservoirs, which could lead to a significant reduction in the energy available for sale by the Company’s hydroelectric plants in 2015, affecting the Company’s revenues and cash position. You’ll notice management mentions the current drought as one of the culprits for its financial insecurity. I have dismissed this initially, but it turns out Brazil is facing the worst drought in the last 80 years . As the drought reduces hydropower availability, distributors must supply electricity purchased at much higher rates on the spot market or generated by more expensive power plants. This is significant, as more than half of Cemig’s operational costs during the last quarter was the cost of electricity purchased for resale. I believe Cemig’s bottom line could benefit immensely from a change in Brazil’s weather. If management decides to hold on to the policy of paying only 25% of earnings as dividends, and the exchange rate remains steady, we might see another $0.15 dividend being declared next year, a 7.6% yield at current prices. I consider this a good value, even after factoring in a worst-case scenario of a complete loss of all three power plants discussed above, which is why I’ve recently added to my position in Cemig.

One Asset Class You Can’t Do Without

Summary The market has been battered by slow global growth and the uncertainty of a looming rate hike by the Federal Reserve. Nonetheless, for years to come, the U.S. is likely to perform well. The Vanguard S&P 500 ETF is the best exchange-traded fund for investing in the U.S. stock market, which is the one asset class you can’t do without. In the search for the right mix of portfolio asset classes, it is tempting to overlook the obvious: the U.S. stock market. Alternative asset classes and exotic emerging markets may look appealing for investors seeking to diversify. But it does not pay to bet against America. So far this year, the U.S. market has been beaten down by fears about slow global growth and the possibility of the Federal Reserve pushing rates higher. For years to come, however, the U.S. is likely to perform well. Keeping a primary, core position in a U.S. stock market exchange-traded index fund is a simple yet profitable investment strategy. The U.S. is still number one China, Russia, Brazil, and India are becoming economic heavyweights on the world stage. The new century brings the possibility that the U.S. will no longer be the largest economy in the world. But this macroeconomic story does not necessarily translate into a good investment idea. Emerging markets, measured by the Vanguard Emerging Markets ETF (NYSEARCA: VWO ), have lagged the U.S. market, measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), over the past ten years: Source: YCharts Faster economic growth has not resulted in better investment returns. Rather, the U.S. has produced higher returns with less risk than emerging markets. The ten-year standard deviation of the U.S. market is 14.7 compared to 23.7 for emerging markets, according to Morningstar . Emerging markets are plagued by intrusive governments that restrict free market forces and lack the rule of law that Americans take for granted. In addition, the U.S. excels at creativity and innovation. Rule of law, creativity, and free markets give the U.S. market an edge in the world economy that is likely to continue. The U.S. is still the strongest economy and stock market in the world. A basic choice to focus on the domestic U.S. asset class rather than scattering across the globe in search of exotic alternatives helps form a solid foundation for your portfolio. Investing in the U.S. market is the most important asset allocation decision for investors to make. Exchange-traded index funds are a good way to capture broad asset classes, such as the U.S. market. The Efficient Market Hypothesis maintains that the market is so efficient that current prices reflect all relevant information. Therefore, it is very difficult to outperform by picking individual stocks. Buying the index rather than select stocks within the index is the winning strategy for most investors. Index funds run on autopilot, tracking a predetermined basket of stocks. Thus, index funds trade less frequently and are more tax efficient than traditional, actively managed funds operated by a high-cost stock picker. The Vanguard S&P 500 ETF In my opinion, Vanguard offers the best index funds in the marketplace. Vanguard is the market leader in the index fund space, with emphasis on low costs and ethics that put investor interests first. The Vanguard S&P 500 ETF (NYSEARCA: VOO ) is the best choice for investors seeking to establish a core position in domestic U.S. stocks. The S&P 500 Index is one of the most widely used proxies for the U.S. market. As the name suggests, it contains 500 stocks. The S&P 500 is broader than the Dow Jones Industrial Average, which contains only 30 stocks. VOO is the lowest-cost ETF tracking the U.S. market, as far as I know, priced at 0.05% of assets per year. The fund industry average expense ratio is 1.02%, according to Vanguard . Accordingly, VOO is priced 95% lower than the fund industry average. This cost advantage along with the difficulty of picking stocks help make index funds the winning choice. Very few professional fund managers or individual stock pickers – that includes most Seeking Alpha Contributors – can consistently outperform the S&P 500. In 2014, for example, it was reported that 85% of fund managers failed to outperform their benchmark indexes . On the other hand The U.S. economy and stock market are not perfect. The last ten years included an epic housing-market crash, the Great Recession, and a U.S. Government bailout of too big to fail Wall Street banks. Reckless politicians on Capitol Hill seriously contemplated a voluntary default on U.S. debt obligations, making the U.S. seem more like a high-risk emerging market than a developed one. While it is wise to focus your asset allocation on the U.S. market, U.S. stocks should not be the only asset class in your portfolio. Asset-class diversification can help to improve long-term risk-adjusted returns. My point is that attempts to diversify away from U.S. stocks should not be overdone. The Vanguard S&P 500 ETF is likely to outperform the vast majority of those who seek to pick individual stocks. But VOO cannot do better than the S&P 500 Index it seeks to track. The bottom line It pays to invest in America. The U.S. certainly has its fair share of problems. But the U.S. is still number one when it comes to the economy and financial markets. Buying and holding a broadly diversified U.S. stock market index fund such as VOO is a smart decision. The U.S. is the one asset class you can’t do without.