Tag Archives: ideas

Best And Worst Q1’16: Large Cap Value ETFs, Mutual Funds And Key Holdings

The Large Cap Value style ranks second out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Large Cap Value style ranked first. It gets our Neutral rating, which is based on aggregation of ratings of 46 ETFs and 915 mutual funds in the Large Cap Value style. See a recap of our Q4’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 8 to 1021). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Large Cap Value 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 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 The Legg Mason BW Dynamic Large Cap Value Fund ( LMBGX , LMBEX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. The FlexShares Quality Dividend Index Fund (NYSEARCA: QDF ) is the top-rated Large Cap Value ETF and the Brown Advisory Equity Income Fund (MUTF: BAFDX ) is the top-rated Large Cap Value mutual fund. Both earn a Very Attractive rating. The Global X Super Dividend US ETF (NYSEARCA: DIV ) is the worst-rated Large Cap Value ETF and the Copeland International Risk Managed Dividend Growth Fund (MUTF: IDVGX ) is the worst-rated Large Cap Value mutual fund. DIV earns a Neutral rating and IDVGX earns a Very Dangerous rating. Eaton Corporation (NYSE: ETN ) is one of our favorite stocks held by KDHIX and earns an Attractive rating. Eaton was featured as a Long Idea in December 2015. Over the past decade, Eaton has grown after-tax profits ( NOPAT ) by 14% compounded annually. The company currently earns a 9% return on invested capital ( ROIC ), up from just 4% in 2009. Despite long-term improvement in fundamentals, ETN remains undervalued. At its current price of $57/share, ETN has a price to economic book value ( PEBV ) ratio of 0.9. This ratio means that the market expects Eaton’s NOPAT will permanently decline by 10% from current levels. If Eaton can grow NOPAT by just 7% compounded annually over the next decade , the stock is worth $70/share today – a 23% upside. Advance Auto Parts (NYSE: AAP ) is one of our least favorite stocks held by Large Cap Value ETFs and mutual funds. AAP earns a Very Dangerous rating and landed on February’s Most Dangerous Stocks list. From 2010 to the last twelve months, Advance Auto Parts’ NOPAT has declined by 2% compounded annually. Over this time, Advance Auto Parts’ ROIC has declined from 12% to 5%. With the continued deterioration of the business, AAP is overvalued. To justify its current price of $153/share, Advance Auto Parts must grow NOPAT by 10% compounded annually for the next 15 years . This expectation is at odds with Advance Auto Parts declining profitability over the past few years. Figures 3 and 4 show the rating landscape of all Large Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds 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. 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.

Why Investors Need Independent Research

Some of the best research in the world comes from Wall Street. It has long been a leader in providing investors with ideas and strategies for investing. At the same time, it is important not to paint all Wall Street research with the same brush. Not all of Wall Street is the same, and some of the research it produces poses certain risks. Risk of Conflicts Of Interest Are Significant The “Chinese” wall exists to ensure that research analysts aren’t influenced by the desire of investment bankers to get deals. That wall is not always as solid as outsiders might think. After the tech bubble, investigations revealed that analysts got paid to help the firm win more IPO business by writing positive reports on stocks they knew were not so good. For instance, one analyst sent an internal e-mail calling a company “such a piece of crap” on the same day his firm published a “Buy” rating on the stock. That company, Excite @ Home, filed for bankruptcy the next year. One might hope that the punishments handed down in the $1.4 billion Global Research Settlement would prevent conflicts of interest affecting research ratings, but that doesn’t seem to be the case. In 2014, the Financial Industry Regulatory Authority (FINRA) fined 10 banks for allowing their analysts to participate in the pitching process for the Toys “R” Us IPO. “I would crawl on broken glass dragging my exposed junk to get this deal,” one analyst wrote to his colleagues . Conflicts Of Interest Are Inevitable It’s understandable why Wall Street analysts would end up getting pressured to help out the investment bankers. After all, equity research is a cost center and does not directly generate any revenue. Revenues come primarily from trading and underwriting, with IPO’s usually offering the biggest paydays. Analysts that don’t help the firm bring in more deals get fired, even if their ratings are accurate. See Fortune’s ” The Price of Being Right “. Plus, the competition for the big paydays from deals heightens the pressure on analysts. In the example above, 10 banks were pitching Toys “R” Us. Every bank knew they had to offer favorable analyst coverage as part of the package, or the retailer would go with one of their competitors. Not surprisingly Wall Street ratings have a significant positive bias. An analysis from Bespoke Investment Group found that, of the 12,122 ratings out there for all stocks in the broad market index, less than 7% were labeled sells, as shown in Figure 1. Figure 1: Wall Street Rarely Issues Sell Ratings Click to enlarge Sources: Bespoke Investment Group Wall Street Is Built On Getting and Giving The Scoop The best way to make money is to be one step ahead of other investors. Sometimes it can be hard to distinguish between “scoop” and inside information. Before Reg FD , Wall Street analysts thrived on passing inside information to their biggest and best clients. That habit is hard to break. It is not surprising that analysts are still trying to find ways to get an edge. As a result, most professional investors know that an analyst’s published research might not always tell the whole story. To get the whole story you have to meet with the analyst in person or attend an “idea dinner”. A recent FINRA fine involved analysts holding “idea dinners” where they offered opinions that sometimes contradicted their published ratings , such as highlighting a “short” call that they’d upgraded to “hold” in public. Sometimes there are reasonable explanations for these contradictions. Maybe new information has changed the analyst’s opinion but they haven’t had the chance to update their report. Maybe the individual investors they’re talking to have a different time frame from the general public. In other cases, analysts might avoid publishing negative research in order to maintain a good relationship with executives . The top investors get word from the analyst to sell, but ordinary investors reading the research reports still see a “Buy” rating. Ultimately, the clients at these “idea dinners” have privileged access because they trade more, and are therefore more valuable to the bank. Consequently, they get a different level of information than those without direct access to analysts. And that’s the real message here. There are a lot of really smart and dedicated analysts on Wall Street, but their interests are not always aligned with the average investor’s. Sometimes, the analyst’s goal to make money for his or her firm overrides the desire to serve the best interests of investors. Most Analysis Behind Ratings Is Not Rigorous The models used by most sell-side analysts tend to rely on accounting earnings or, even worse, non-GAAP earnings . Since CFO’s agree that 20% of companies have misleading earnings , those numbers are not reliable. However, there’s no real incentive for analysts to do the hard work required to reverse accounting loopholes and get to the underlying economics of a business. The lack of conviction behind investment research explains why, for instance, Goldman Sachs has already reversed itself on five of its six big calls for 2016 . Investors that based their strategies around those calls this year are now faced with some difficult decisions. The bottom line is that investors should not be making decisions based solely on Buy and Sell calls from Wall Street. There are plenty of cases where a “Buy” is not really a “Buy”, as highlighted by Integrity Research . Whether it’s to keep the boss or a big client happy, to maintain a relative sector balance, or simply due to being overworked, these ratings can be influenced by many factors besides fundamentals. Independent Research Offers Protection As we state at the beginning of this article, Wall Street provides some of the best research in the world. The connections that many analysts can make with executives sometimes give them unique insight into companies. They can offer valuable commentary on industry trends. There are, however, certain conflicts ingrained with the way Wall Street does business. There is real value in incorporating an independent perspective. Investors deserve research that gets to the core drivers of valuation . They deserve independent due diligence because it is part of fulfilling fiduciary duties and it tends to pay . This diligence helps us to identify stocks that are poised to blow up . As just one example, three months ago, we put Qlik Technologies (NASDAQ: QLIK ) in the Danger Zone. At that time, 21 out of 27 analysts had Buy or Overweight ratings on the stock, and no one had Sell recommendations. Since that date, the stock is down almost 40%. Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, style, 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.

Plan To Survive: Be Systematic! (Part 4)

My favorite strategy indices have a low correlation to both stocks and to bonds. As always, our cutting-edge strategy indices are only available to subscribers, but I hope that some of the strategy indices presented here will provide inspiration for readers to create their own methods for dealing with an increasingly difficult investment environment. Remember, hope is for people who do not use data. Wise investors plan using evidence-based methods. The logic behind this strategy index is that we can generate return from exposure to a leveraged S&P 500 position which only risks 30% of our capital. The position almost acts like a synthetic call option on the S&P 500. We can hedge this exposure imperfectly, but somewhat effectively, by buying leveraged long duration government bonds, getting short leveraged Euros (deflation anyone?), and by buying leveraged gold in case of monetary instability or inflation. I think this strategy could struggle if stocks and bonds drop simultaneously, with the dollar weakening vs. other currencies. Please note that even though the rules of this strategy index have been publicly released, like any other index, we require the execution of a licensing agreement with ZOMMA LLC for any form of commercial use, whatsoever. ZOMMA Quant Warthog II Rules: I. Buy UPRO (NYSEARCA: UPRO ) with 30% of the dollar value of the portfolio. II. Buy TMF (NYSEARCA: TMF ) with 20% of the dollar value of the portfolio III. Buy EUO (NYSEARCA: EUO ) with 40% of the dollar value of the portfolio. IV. Buy UGL (NYSEARCA: UGL ) with 10% of the dollar value of the portfolio. V. Rebalance annually to maintain the 30%/20%/40%/10% dollar value split between the instruments. Here are the results of a backtest of these rules in a log scale: (click to enlarge) Click to enlarge (click to enlarge) Click to enlarge This strategy index has powered through recent market volatility largely unscathed. Its Sharpe and MAR decimate the S&P 500 over the same period, with true multi-asset class exposure for both return generation and hedging. This helps the strategy achieve a lower volatility than that of the S&P 500, with a CAGR which exceeds the S&P 500’s by approximately 6% per year. Thanks for reading. We feature even more impressive strategy indices in our subscription service. If this post was useful to you, consider giving it a try. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UPRO, UGL over 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.