Tag Archives: automotive

Momentum, Quality And Low Volatility: Continuing The Quest For Smarter Beta

Summary In November I introduced a smart beta portfolio based on MSCI’s indexes for quality, momentum and low volatility. The semi-annual rebalancing of those indexes is complete. I review the previous six-month performance and determine the components of the rebalanced MQLV portfolio. In early November I proposed the idea of using the iShares smart beta ETF portfolios as a filter for building one’s own risk-premia portfolio ( A Quest for the Smartest Beta ). I started from three ETFs, each indexed to a single factor: Low Volatility, Momentum and Quality. iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ) iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ) Taken together, these three ETFs make a solid holding as seen in this table showing results of an equal weighted portfolio of the three ETFs vs. the S&P 500 since the inception of QUAL, the youngest of the three, in August 2013. (click to enlarge) Starting from the premise that each of the ETFs is selecting for a single “smart-beta” factor I wanted to look at the intersection of the three funds. I asked if there were overlapping positions in all three ETFs. I compared their full sets of holdings looking for that overlap. There were 14 funds shared by all three. I reasoned that since each of the 14 passed the MSCI filters for low-volatility, momentum and quality, it could be worth looking at a portfolio comprising all 14, in effect, a portfolio located at the intersection of Quality, Momentum and Low Volatility. June through November Results The 14 stocks from the end of May rebalance are: Arch Capital Group Ltd (NASDAQ: ACGL ) Accenture PLC (NYSE: ACN ) Axis Capital Holdings Ltd (NYSE: AXS ) Chubb Corp (NYSE: CB ) Chipotle Mexican Grill Inc. (NYSE: CMG ) Home Depot Inc. (NYSE: HD ) Eli Lilly (NYSE: LLY ) Nike Inc. Class B (NYSE: NKE ) O’Reilly Automotive Inc. (NASDAQ: ORLY ) Reynolds American Inc. (NYSE: RAI ) Starbucks Corp (NASDAQ: SBUX ) Sigma Aldrich Corp (NASDAQ: SIAL ) Visa Inc. Class A (NYSE: V ) W.R. Berkley Corp (NYSE: WRB ) Each of the ETFs is rebalanced to a revised index twice annually, on the last business days of May and November. So, when I looked at the portfolio, let’s call it MQLV , it had a five-month record from its “inception” on the last business day of May. It had performed well. For the five months from June 1 to Nov 1, it turned in a CAGR of 41.0% vs SPY’s -1.30%. Now that the full cycle is complete we can update performance at the close of the six-month holding period. It performed thusly: (click to enlarge) That is a quite impressive performance record. In a market environment where the S&P 500 index could only muster a 1.74% total return, MQLV chalked up nearly 19%. Sharpe (2.21) and Sortino (7.29) ratios are at rarely seen levels. Pretty good evidence that there may well be something to this idea. Not in any way definitive, of course; it is, after all, a single cycle. But those results are surely saying “Hey, look over here.” Rebalancing for December through May Now that MSCI has rebalanced the indexes, I let’s have a look at the changes. The current overlap for the three funds has moved from 14 to 18 stocks. Eleven remain from the previous list. There are seven new entries, and three have dropped off. The additions are: Costco Wholesale Corp (NASDAQ: COST ) Henry Schein Inc (NASDAQ: HSIC ) Lockheed Martin Corp (NYSE: LMT ) Mcdonalds Corp (NYSE: MCD ) Public Storage REIT (NYSE: PSA ) Travelers Companies Inc (NYSE: TRV ) Ulta Salon Cosmetics & Fragrance I (NASDAQ: ULTA ) And the deletions: Chipotle Mexican Grill Inc. Reynolds American Inc. Sigma Aldrich Corp CMG is no longer included in MTUM’s holdings but remains in USMV and QUAL. RAI was dropped from QUAL; it remains in USMV and MTUM. SIAL was acquired. The sector mix is dominated by Consumer Discretionary and Financials which account for 12 of the 18 positions. (click to enlarge) If we combine these 18 positions into an equal-weighted portfolio, the portfolio metrics are as follows: (click to enlarge) (from investspy.com based on one-year’s data) One-year performance for these 18 is outstanding, having beaten SPY 27.7% to 3.5% for the year. This is, of course, no indication of what the portfolio will do over the next six months between now and the next rebalance, but it does auger well for success. And, let’s not forget, 11 of these holdings were included in the previous iteration which trounced SPY handily. Here is a correlation matrix for the holdings. (click to enlarge) Running the portfolio through Portfolio Visualizer’s four-factor analysis produces the following regressions. Once again, it’s based on one-year’s data. (click to enlarge) As commenters pointed out in discussing the November article, there is little exposure here to size, all but three of the size exposures are negative. Several suggested that I should include the value factor. I argued that value was inherent in some of the selection criteria used by USMV and QUAL, so adding an ETF like the iShares MSCI USA Value Factor ETF (NYSEARCA: VLUE ) would be redundant. That point of view was confirmed to a large extent by including the VLUE and the iShares MSCI USA Size Factor ETF (NYSEARCA: SIZE ) portfolios in the analysis as a follow-up ( Expanding the Smart Beta Filter: Does It Help? ). Now, from the results of this regression analysis of the Fama-French factors, we can see that value exposure is, in fact, fairly high. This result confirms my sense that value was being addressed at least partially, even though it is not a specific factor for any of the three source ETFs. HSIC, LLY, LMT, SBUX are negative for value, but the rest are positive or neutral. Unsurprisingly, momentum exposure–the only factor specifically selected for by a source ETF–is high; only LLY is negative here. Given the extraordinary success of the June through November record I am excited to see how the rebalanced portfolio performs. At 18 positions this is a fairly large commitment for an outright investment, but it could well be worth some serious thought. To me, the concept appears sound and the track record, limited though it may be, is supportive. Is it actionable? I’d like to think so, but the hard evidence, however impressive, is sketchy. So any action taken would be largely based on an appreciation for the conceptual basis of the strategy. I’ll be keeping this updated as we move forward.

Spinoffs: Looking For Value

Investing in and around spinoffs has been an extremely lucrative endeavor over the past decade, according to the Nov. 30 issue of Value Investor Insight. Indeed, since the end of 2002, Bloomberg has maintained a U.S. Spin-Off Index, which tracks the share prices of newly spun-off companies with market capitalizations of more than $1 billion for three years after they begin trading. Over the near 13-year period tracked, Bloomberg’s U.S. Spin-Off Index has risen 557%, compared to a return of 137% for the S&P 500. Moreover, spinoff activity is close to an all-time high as companies, spurred on by activists, try to unlock value for shareholders by splitting up their businesses. This year’s total number of spinoffs is expected to be 49, the fourth-highest level on record. However, more often than not, due to a number of factors, spinoffs are mispriced by the market, which can lead to some very attractive opportunities for value investors. In this month’s issue of Value Investor Insight , four spinoff experts – Murray Stahl of Horizon Kinetics, Joe Cornell of Spin-Off Advisors, The London Company’s Jeff Markunas and Jim Roumell of Roumell Asset Management – discuss the key factors that lead to spinoff mispricing and where they’re looking for opportunity today. (click to enlarge) Spinoffs: Four key factors There are four key structural factors that can lead to spinoffs being mispriced : Limited information – The documentation filed with the SEC when companies split can be quite complex, and the pro-forma financials can be difficult to analyze. Moreover, analyst coverage tends to be limited, and investors, rather than do the legwork themselves, would rather look elsewhere. Forced selling – A spinoff may see a parent company force a SpinCo onto a shareholder that doesn’t want, or legally can’t hold the shares, which will lead to selling. An S&P 500 Index fund can’t own a spinoff company outside the index, for example. Sandbagging – SpinCo managements usually receive significant financial incentives to underperform and over-deliver. Top managers’ incentive stock plans are typically based on average share prices of the spinoff company for the first 20 or so days of trading after the spinoff, which can lead to sandbagging of the highest order before those prices are locked in. ” Capitalism works ” – According to Value Investors Insight , when a SpinCo leaves its parent, “pent-up entrepreneurial forces are unleashed” as “the combination of accountability, responsibility, and more direct incentives take their natural course.” In other words, without the parent, the newly independent company can take advantage of capitalist forces to improve performance. Spinoffs: Looking for value So what do the experts look for in a good spinoff? According to Murray Stahl of Horizon Kinetics, there are four key characteristics to look for when a company spins off an unwanted subsidiary or division. First, a higher-margin business is spinning off a lower-margin business. Second, CEO movements. If the CEO of the larger company decides the best place to be is with the spinoff it’s, “a message to heed.” There’s also the capital structure of the SpinCo to consider. Too much debt dumped on the SpinCo from the parent can be a burden that haunts the company and strangles growth. That said, if figures show that the debt can be paid down over time, this creates an opportunity, like a publicly-traded leveraged buyout, according to Murray Stahl. And the last spinoff situation that creates an opportunity for profit is the very small spinoff that those engaged in industrial-scale money management are unable or unwilling to own (market cap

Auto ETFs And Stocks To Ride On This Holiday Season

The auto industry has been on a high gear and remains on track to break the all-time record of 17.35 million vehicles reached in 2000. Once again, the monthly auto sales data spread bullishness into the entire industry across the globe. In particular, auto sales rose 1.4% year over year to an annualized 18.2 million units in November. This represents the highest auto sales in 14 years and the third consecutive month of 18 million plus sales. Five of the six major American and Japanese automakers reported solid sales growth for November. Nissan ( OTCPK:NSANY ) led the way higher with 4% growth, followed by sales increases of 3% for Fiat Chrysler Automobiles (NYSE: FCAU ), 3.0% for Toyota (NYSE: TM ), 1.5% for General Motors (NYSE: GM ) and 0.3% for Ford Motor (NYSE: F ). However, Honda’s (NYSE: HMC ) auto sales fell 5% last month. A major boost came from attractive year-end offers, Black Friday deals, higher demand for sport utility vehicles, cheap fuel and low financing costs. Further, a plethora of new models, the need to replace aging vehicles, higher income, increasing consumer confidence, and higher spending power are adding enough fuel. The robust trend is likely to continue this month as well, as automakers continue offering discounts and holiday season incentives. Further, about two-thirds of the industries falling under the auto sector have a strong Zacks Rank in the top 39%, suggesting healthy growth. As such, investors seeking to take advantage of the current boom may consider the ETFs and stocks from this corner of the broad market. ETFs to Buy First Trust NASDAQ Global Auto Index ETF (NASDAQ: CARZ ) This fund offers pure play global exposure to the 37 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is a large-cap centric fund, highly concentrated on the top 10 holdings with about 62% of assets. The four prime automakers – General Motors, Ford, Honda and Toyota – are among the top five holdings. In terms of country exposure, Japan takes the top spot at 36.8% while the U.S. and Germany round off the next two spots with 23.4% and 18.3% share, respectively. CARZ is under appreciated as indicated by its AUM of only $41.1 million and average daily trading volume of about 10,000 shares. The product charges 70 bps in fees per year and has gained 2.4% in the year-to-date time period. It has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook. Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) While XLY provides broad exposure to the consumer discretionary space, investors could go for this product as it has an at least 8% allocation to the auto industry. It holds 90 securities in its basket and some well known automakers like Ford, General Motor, O’Reilly Automotive (NASDAQ: ORLY ) and Delphi Automotive (NYSE: DLPH ) make up for a nice mix in the portfolio. It is the largest and the most popular product in this space with AUM of nearly $11.7 billion and average daily volume of roughly 6.6 million shares. It charges 14 bps in annual fees from investors and has gained 14.3% so far this year. The fund has a Zacks ETF Rank of 2 with a Medium risk outlook. Stocks to Buy We have used our Zacks stock screener to find out the best stocks in the auto space having a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Growth Style Score of ‘B’ or better. The Growth Style Score analyzes the growth prospects of a company with a thorough analysis of the income statement, balance sheet and cash flow statement that evaluate its financial health and the sustainability of growth trajectory. The results show that stocks with Growth Style Scores of A or B when combined with Zacks Rank of 1 or 2 offer the best upside potential. Superior Industries International Inc. (NYSE: SUP ) Based in Southfield, Michigan, Superior Industries is one of the world’s largest original equipment manufacturer (OEM) of aluminum wheels for the automotive industry. It designs, manufactures and supplies cast aluminum road wheels to the automobile and light truck manufacturers. The stock has seen positive earnings estimate revisions from 90 cents to 93 cents per share for 2015 over the past 60 days, representing a year-over-year increase of 43.1%, which is much higher than the industry average of 5.4%. The company delivered an average positive earnings surprise of 32.44% in the last four quarters. The stock has a Zacks Rank #1 with a Growth Style Score of B, meaning that it is primed for further growth in the months to come. Motorcar Parts of America Inc. (NASDAQ: MPAA ) Based in Torrance, California, Motorcar Parts is a leading manufacturer of auto parts like replacement starters, alternators, wheel hub assemblies, bearings and master cylinders used for imported and domestic passenger vehicles, light trucks, and heavy-duty applications in the United States and Canada. The company has seen a solid earnings positive estimate revision of 6 cents for the current fiscal year over the past 60 days and is expected to grow at an annual rate of 24.4% versus negative industry growth. Further, the company delivered positive earnings surprises in the three of the past four quarters, with an average beat of 4.64%. The stock currently has a Zacks Rank #1 with a Growth Style Score of B, suggesting incredible growth in the months ahead. Bottom Line Holiday fervor, massive discounts, an improving economy, and increased consumer spending will continue to drive U.S. auto sales higher in the weeks ahead, making the above ETFs and stocks compelling choices for investors to play this holiday season. Original Post