Tag Archives: outlook

A Few Reasons Why Investors Need Advisors: Financial Advisors’ Daily Digest

Wealthfront, one of the big three robo-advisors, says low fees aren’t everything – an excellent arrow for human advisors’ quivers as well. Evan Powers exemplifies the benefit of having an advisor (and listening to him), as he recounts the sorry tale of Prince’s recent passing without a will. Michelle Waymire provides the bottom line for FAs’ social media usage, and Lance Roberts recounts the experiences of clients on their first day of retirement. Today’s Seeking Alpha Financial Advisors’ Daily Digest provides an embarrassment of riches for advisors, so I’ll try to keep this brief before getting to the links. First, I was struck by Wealthfront’s latest post. Of course, the robo-advisor par excellence is supposed to be advisors’ chief nemesis, and indeed the article is not shy about extolling its offerings as an investor’s ultimate solution. Yet, in arguing that ” investment fees matter, but taxes matter even more,” I believe the robo-advisor is perhaps unintentionally offering a pretty juicy bone to human advisors by saying, in essence, don’t sweat the small stuff like fees. And as if to prove that point, comes along one of SA’s newer contributors, Evan Powers, with an article about how Prince’s untimely intestate passing will cost his heirs hundreds of millions of dollars in avoidable fees and taxes. Powers is an investment advisor, not an estate attorney, and yet his highly intelligent and informed framing of the issue is a clear reminder of the value of having an advisor’s counsel. And speaking of intelligent and well-informed new contributors, Michelle M. Waymire offers a highly readable and clear description of what advisors need to know about using social media. I admit I’ve seen a fair amount of kitschy stuff on that topic, but Michelle has done the homework of going through the rulebooks and provides a bottom line in a simple and pleasant way. Before moving on to today’s links, it is my strong recommendation that you follow Evan’s and Michelle’s feeds straightaway to avoid the risk of missing their next articles. And as I mentioned, we’ve got some really great advisor content today: Your comments, as always, are welcome below.

What’s In A Multiple?

What’s a company worth? Seasoned investors know that finding the answer to that question is more art than science. One way to do so is from the bottom up, to calculate a firm’s intrinsic value using a discounted cash flow methodology. The other is to come at the question from the top down, by using a relative valuation approach via market multiples. While there are many types of multiples, each reflects the market’s evaluation of a company’s expected operational performance, and can be used to cut across times, sectors, and markets. Investor expectations about future revenue growth and profitability both play a key role in driving multiples. Investors obviously prefer high levels of both. But if there’s only one to be had, which combination do investors value more highly? Superior growth and low profitability? Or lower growth and high profitability? Credit Suisse recently analyzed the performance and multiples of companies with market capitalizations of more than $1 billion (excluding financial firms and utilities) between 2004 and 2015, to find out. Not surprisingly, the bank found that companies with above-median projected growth in revenue and above-median projected profitability traded at an 11.5x EV/EBITDA multiple, compared to just 7.5x for firms with below-median estimates for future revenue growth and profitability. (For reference, the median projected revenue growth was 5.4 percent and the median profitability was 6.5 percent cash flow return on investment.) But back to the question of revenue growth versus profitability. It turns out that firms with below-median forecasted growth but above-median projected profitability earned higher EV/EBITDA multiples (10.2x) than faster-growing but less profitable companies (8.7x). Furthermore, increases in expected profitability had more of an effect on valuations than did an increase in expected sales. Regardless of whether a company is expected to grow above or below the market median, if it manages to improve profitability above median levels, the effect is dramatic – an additional 2.7 times enterprise value relative to the company’s forward cash flows. That was more than twice the effect that improving revenue growth – an additional 1.2 times EV/EBITDA – awarded to those companies that managed to climb into above-median revenue growth territory. Those that were able to vault over the median in both categories saw multiples rise by 4x EV/EBITDA. In short, growth matters more when you combined it with superior return on capital. Source: Credit Suisse HOLT Corporate Advisory It’s interesting to note that the current preference for profitability over growth is a relatively recent phenomenon. Between 2004 and 2007, companies with above-average revenue growth expectations traded at higher valuations than those with high profit expectations. During the financial crisis, there was no clear pattern to investor preferences, but high-profitability companies began to deliver higher premiums in 2012. One possible rationale for the shift: Over the past decade, it’s been easier to keep returns on capital up than to produce drastic increases in sales. Fewer than one-third (29 percent) of companies that produced above-average revenue growth between 2004 and 2009 did the same between 2010 and 2015, while nearly two-thirds (64 percent) of companies that were highly profitable in the first five-year period remained so in the second. Investors, in other words, can be fickle. So how should that affect executive decision-making? For executives making resource allocation decisions, it’s clear that both profitability and growth matter. But understanding exactly what drives investor sentiment about a company is important not only in choosing between competing strategies – those promising faster growth or superior profitability (or, in an ideal world, both) – but also what to buy and how to buy it. Knowing how expectations of future growth and profitability drive valuations can help companies decide on the right price to pay for potential targets as well as secondary decisions, such as whether equity or cash purchases make more sense. In other words, multiples matter for more than just bragging rights. Original Post

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

The Consumer Discretionary sector ranks fifth out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Consumer Discretionary sector ranked fifth as well. It gets our Neutral rating, which is based on aggregation of ratings of 13 ETFs and 19 mutual funds in the Consumer Discretionary 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 Consumer Discretionary sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 389). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Discretionary sector 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 PowerShares Dynamic Retail Portfolio (NYSEARCA: PMR ), PowerShares S&P SmallCap Consumer Discretionary Portfolio (NASDAQ: PSCD ), and Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (NYSEARCA: RCD ) 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 ICON Consumer Discretionary Fund (MUTF: ICCCX ), Rydex Series Leisure Fund (RYLIX, RYLAX) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. PowerShares Dynamic Leisure & Entertainment Portfolio (NYSEARCA: PEJ ) is the top-rated Consumer Discretionary ETF and Fidelity Select Leisure Portfolio (MUTF: FDLSX ) is the top-rated Consumer Discretionary mutual fund. PEJ earns a Very Attractive rating and FDLSX earns an Attractive rating. SPDR S&P Retail ETF (NYSEARCA: XRT ) is the worst rated Consumer Discretionary ETF and Rydex Series Retailing Fund (MUTF: RYRTX ) is the worst-rated Consumer Discretionary mutual fund. XRT earns a Neutral rating and RYRTX earns a Very Dangerous rating. 451 stocks of the 3000+ we cover are classified as Consumer Discretionary stocks. Carnival Corporation (NYSE: CCL ) is one of our favorite stocks held by PEJ and earns an Attractive rating. Since 1998, Carnival has grown after-tax profit ( NOPAT ) by 6% compounded annually. The company currently earns a 7% return on invested capital ( ROIC ), which is improved from the 4% earned in 2013. Over the past five years, Carnival has generated a cumulative $8 billion in free cash flow ( FCF ). Best of all, CCL is currently undervalued. At its current price of $49/share, CCL has a price-to-economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Carnival’s NOPAT to never meaningfully grow from current levels. If Carnival can grow NOPAT by just 4% compounded annually for the next decade , the stock is worth $68/share today – a 39% upside. Amazon.com (NASDAQ: AMZN ) remains one of our least favorite stocks held by RYRTX and earns a Dangerous rating. Over the past decade, Amazon’s economic earnings have declined from $242 million to -$508 million. The company’s ROIC has declined from 27% in 2005 to 6% in 2015, which represents a clear sign that Amazon’s low margin, grow at all costs business strategy has been an inefficient use of capital. Worst of all, the expectations baked in AMZN already imply the company will be wildly profitable. To justify the current stock price of $667/share, AMZN must grow NOPAT by 22% compounded annually for the next 20 years . In this scenario, 20 years from now, Amazon would be generating over $8 trillion in revenue. Such expectations seem irrationally exuberant and make AMZN one to avoid. Figures 3 and 4 show the rating landscape of all Consumer Discretionary 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.