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How To Find The Best Sector Mutual Funds: Q1’16

Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust Mutual Fund Labels There are at least 242 different Financials mutual funds and at least 647 mutual funds across ten sectors. Do investors need 64+ choices on average per sector? How different can the mutual funds be? Those 242 Financials mutual funds are very different. With anywhere from 22 to 571 holdings, many of these Financials mutual funds have drastically different portfolios, creating drastically different investment implications. The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first for stock selection. Utilities ranks last. Details on the Best & Worst mutual funds in each sector are here . A Recipe for Paralysis By Analysis We think the large number of Financials (or any other) sector mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 571 stocks, and sometimes even more, for one mutual fund. Any investor focused on fulfilling fiduciary duties recognizes that analyzing the holdings of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each sector. Figure 1: The Best Mutual Fund in Each Sector Click to enlarge Sources: New Constructs, LLC and company filings The Fidelity Select Communications Equipment Portfolio (MUTF: FSDCX ) ranks first, the Davis Financial Fund (MUTF: DVFYX ) ranks second, and the Fidelity Select Health Care Services Portfolio (MUTF: FSHCX ) ranks third. The ICON Natural Resources Fund (MUTF: ICBMX ) ranks last. How to Avoid “The Danger Within” Why do you need to know the holdings of mutual funds before you buy? You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter. PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND If Only Investors Could Find Funds Rated by Their Holdings… The Davis Financial Fund (DFVYX) is the top-rated Financials mutual fund and the overall best fund of the 571 sector mutual funds that we cover. The worst mutual fund in Figure 1 is the American Century Quantitative Equity Utilities Fund (MUTF: BULIX ), which gets a Dangerous rating. One would think mutual fund providers could do better for this sector. Disclosure: 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.

Learn Why Traders Love Utilities ETFs

By Jonathan Jones and Tom Lydon The Utilities Select Sector SPDR (NYSEArca: XLU ) , the largest utilities exchange traded fund, is up nearly 14% year-to-date, by far the best performance among the sector SPDR ETFs, and more upside could be coming for utilities stocks and ETFs, reports ETF Trends . Utilities sector fundamentals remain strong. However, utilities have been underforming due to the sector’s inverse relationship to rising interest rates – when rates rise or investors fear higher rates, utilities typically underpeform, and vice versa. Most investors view utilities as a reliable, income-generating asset that exhibit some bond-like characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields. ETFs like XLU got a boost this week when the Federal Reserve opted to not raise interest rates. Further buoying interest rate-sensitive sectors such as utilities is the notion that the Fed will only be able to raise rates twice this year. “Big utility stocks trade at an average of 17 to 18 times projected 2016 earnings, which isn’t cheap considering annual industry earnings growth is generally in the low- to mid-single-digit range. The sector now trades at a premium to the S&P 500, which fetches about 16 times estimated 2016 operating earnings. The utilities ETF (TICKER: ) yields 3.8%, compared with 2.2% for the S&P,” according to Barron’s . Some investors see opportunity with rate-sensitive assets such as XLU and real estate ETFs, noting that 10-year yields are overbought and sentiment against the likes of XLU is at bearish extremes, which could create opportunity from the long side with the utilities sector. Looking at XLU’s chart “you can see that the horizontal trendline near $45 has acted as a very influential level of support and resistance over the past 1.5 years. The breakout (shown by the blue circle) and the subsequent retest of the trendline and its 50-day moving average are technical signals that suggest that the bulls are in control of the momentum and that prices could be headed higher. Most active traders will likely look to enter a position as close to the trendline as possible to maximize the risk/reward of the trade. From a risk management perspective, technical traders will likely set their stop-loss orders below the horizontal trendline or the 200-day moving average ($43.23) depending on risk tolerance,” according to Investopedia . Defensive sectors, such as consumer staples, telecom and utilities, often trade at multiples that are richer than the broader market. That is the price to pay to play defense. Utilities Select Sector SPDR Click to enlarge 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.

Should I Sell My First Energy Stock?

Oddly, this isn’t the first time this thought has popped in to my mind. Last year I wrote a piece titled ” 3 Reasons I Would Sell a Stock .” The listing was created to help me identify holdings that have fallen out of favor in my portfolio or have not performed. After elaborating on the 3 reasons I would sell, I reviewed my portfolio for any stocks that met the criteria. Any takers on guessing which one of the stocks that was discussed in the article? First Energy! Shocker, right? After one heck of a run by the stock that has brought me close to break even, I now find myself asking the question again. Is it finally time to sell my stake in First Energy? First Energy (NYSE: FE ) has been a problem child for me from the beginning. Unfortunately, it sometimes works out like that. Historically, FE has been a stock that pays a high stagnant dividend yield. It is an electric utility after all. Despite the fact that the company’s recent dividend growth rate was non-existent, I was willing to overlook this fact due to the high yield (Which was above 5% at the if I recall). First big mistake right there; I was caught chasing yield and boy did I learn the hard way. Months after I purchased the stock, FE slashed their quarterly dividend from $.55/share to $.36/share. Ugh! That decrease caused a massive sell-off and my position turned red really fast. Isn’t the phrase dividend cut becoming too common on this website? Especially after what happened with KMI and then BBL over the last few months? Finally, after over two long, painful years, my position is at the breakeven point due to dividend re-investment and I have the opportunity to potentially re-coup my initial investment. To determine if I should sell the stock, I want to be able to answer one simple question. If I did not own a stake in the company and had extra capital lying around, would I purchase stock and initiate a position in First Energy? If FE does not pass our stock screener and I would not purchase shares, then why on earth am I holding on to them? Especially considering the fact that I own a small stake in another electric utility that happens to be one of our 5 foundation dividend stocks . Outside of the fact that I am being really stubborn here and don’t want to realize a loss. To answer this question, I decided to run FE through the Dividend Diplomats Dividend Stock Screener to see if FE would pass this daunting test. Let’s see how FE performed. Price to Earnings Ratio Below the S&P 500 – Using FE’s forward EPS per TheStreet.com of $2.84, FE is currently trading at a forward PE multiple of 12.6X, which is well below the PE ratio of the S&P 500. For comparison sake, ED is trading at a multiple of 18.71X. So FE is trading at both a discount to the market and one of the major players in the industry. Payout Ratio below 60% – Using the forward EPS from the line above, FE’s payout ratio is 50% while ED has a payout ratio of 66%. Again, FE passes our metric and shows a better figure than ED. Paying an Increasing Dividend – As I already mentioned earlier, FE cut their dividend to $.36/share per quarter in 2013 and has not increased their dividend since. So this point represents a big negative as my stagnant dividend stream is losing purchasing power each year. For comparison sake, ED is a Dividend Aristocrat and has a 5 year average dividend growth rate of 1.9%. This really isn’t much better; however, at least their dividend is growing at a rate near inflation. Dividend Yield – This isn’t one of the metrics on our stock screener, but it is worth pointing out. FE’s current dividend yield is about 4% while ED has a current yield of about 3.56%. Debt to Equity Ratio – Again, this metric is not a part of our initial stock screener. I began focusing on the impact of debt on a company when my KMI dividend was slashed significantly. However, I really should have begun looking at a company’s debt burden when I purchased stock in First Energy. Per finviz.com, FE has a Debt to Equity Ratio of 1.78X and ED has a Debt to Equity ratio of 1.09X. I understand that debt is not always a necessarily a bad thing, but I am a little “debt averse” after my recent experiences. So much so that I even created a Top 5 list to identify Dividend Aristocrats with low debt to equity ratios. We all have flavors of the month and mine is currently LOW DEBT! Now that I have run some numbers, let’s get back to my original question. Would I purchase shares in First Energy today based on the information above. The answer is…..no. So why am I not logging into Capital One Investing now and selling my stock? Where is my hesitation and why am I struggling to make a decision here? What has me torn is that while the stock may not have passed all metrics in our screener, it didn’t fail all of the screeners. In fact, when compared to another company in its industry, the company appears to be trading at a significant discount while sporting a higher dividend yield. The fact the company is trading at a discount makes perfect sense to me when you consider some of the negative factors I mentioned above. Is the dividend growth rate terrible? Yes. Do they have a lot of debt? Yes. However, their payout ratio is well below our 60% threshold. So the answer isn’t as clear as I was hoping it would be by the time I reached the end of this article. So all of you, I am asking you for your help here. You offered Lanny some great advice about his internet package this week and I have loved reading your responses as they have come in. So I would love to get your take on my dilemma. If you were me, would you sell your stake in First Energy? If so, what other companies would you recommend? I am thinking I would go the ultra safe route and purchase a foundation stock or one of the stocks on my “Always Buy” list with the proceeds. Are there other utilities I should consider as well? Please everyone, help me out here! -Bert