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VBK: The Benefits Of Small-Cap Growth Stocks

By Jonathan Jones and Tom Lydon Stock-picking is difficult and plenty of data support that assertion. It can be said that the task is even more difficult with smaller stocks, explaining why so many active managers of small-cap funds lag their benchmarks. Over the one-year period, mid- and small-cap growth funds were especially poor performers, according to industry analyst ETF Trends . For instance, only 20% of all mid-cap growth funds outperformed the S&P MidCap 400 Growth Index, and investors paid an average 1.3% fee on mid-cap growth funds for the that underperformance as well. In comparison, mid-cap ETFs have an average expense ratio of 0.42%, according to XTF data. “On an equal-weighted basis, the average mid-cap growth fund returned -1.23% and lagged by 328 basis points in 2015, much higher than the expense ratio incurred,” Rosenbluth said. “This suggests to us that unwarranted stock selections contributed to underperformance.” Additionally, just 12% of all small-cap growth funds outperformed the S&P SmallCap 600 Index. Funds that track larger companies fared slightly better, with 51% of all large-cap growth funds outperforming the S&P 500 Growth index. The Vanguard Small-Cap Growth ETF (NYSEArca: VBK ) is a cost-effective option for investors looking for a passive approach to small-cap growth stocks. Compared to an actively managed small-cap fund, VBK is cheap. Well, compared to almost any fund, VBK is cheap as it charges just 0.09% per year, or $9 for every $10,000 invested. That is less expensive than 93% of rival funds, according to Vanguard . The $3.9 billion ETF holds over 700 stocks, nearly 22% of which are financial services names. Industrials and technology stocks combine for over 34% of VBK’s weight. VBK follows the CRSP US Small Cap Growth Index. “CRSP classifies growth securities using the following factors: future long-term growth in earnings per share (EPS), future short-term growth in EPS, 3-year historical growth in EPS, 3-year historical growth in sales per share, current investment-to-assets ratio, and return on assets,” according to a Seeking Alpha analysis of VBK. Cyclical stocks, like materials, industrials, energy and technology companies, are more economically sensitive and do well when the economy is improving. With the Federal Reserve set to hike rates, the rising rate environment would signal a better economic outlook. Cyclical sectors, which are heavily represented in VBK, currently trade at a discount to the broader market. In addition to its large combined weight to industrial and technology stocks, consumer discretionary names command over 15.5% of VBK’s weight. Vanguard Small-Cap Growth ETF 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.

Facebook Nears New Buy Point As Big Techs Retake Key Levels

Loading the player… A new base is taking shape for Facebook ( FB ), as the social media giant’s stock has finally broken through an area of resistance. Facebook’s popular photo-sharing app Instagram said Tuesday it’s soon rearranging feeds to show posts based on what users would most likely want to see, rather than showing them chronologically. That’s much like an algorithm Facebook uses. Shares are on track for their fourth straight day of gains, with the stock breaking through resistance at the 110 price level. The stock now looks to be forming the right side of a new base, rising 1.2% in soft volume Wednesday. Facebook is trading 4% below its February high and a potential buy point. Apple On 6-Day Win Streak Meanwhile, Apple ( AAPL ) has notched gains for the past five sessions, boosted by a gap-up yesterday, as Morgan Stanley said iPhone demand was tracking ahead of expectations. Volume is tracking lighter than average as the stock looks to gain more today. Up 1.4% in afternoon trade, Apple is now trading above the 105 price level, an area the stock hasn’t traded above since Jan. 4. Apple is 21% below its high reached last April. Amazon, Alphabet, Microsoft Retake 50-Day Lines Among other large-cap tech stocks, Amazon ( AMZN ) was able to retake its 50-day line on Monday and is continuing to hold above that level. Amazon shares are 16% below their late December high and a potential buy point. Amazon stock rose 0.5% intraday. Google parent Alphabet ( GOOGL ) was able to retake its 50-day line last Friday. The stock is now looking to break past resistance at the 750 price level. Alphabet is 6% below its February peak, up 0.8% Wednesday afternoon. Microsoft ( MSFT ) also retook its 50-day recently. Microsoft shares are trading about 4% below a potential buy point, rising 1.5% Wednesday.

Oracle Gives Analysts Some Fun Watching Cloud Rising, Stock Too

After the hell that many hotshot software stocks have put investors through this young year, Wall Street analysts got a break. “Listening to Oracle ( ORCL ) conference calls is always a hoot,” said Canaccord Genuity analyst Richard Davis in a research note Wednesday, following Oracle’s late-Tuesday Q3  earnings that beat analyst estimates . “In the 16 years we’ve followed this firm, we can’t remember a quarter when management wasn’t wildly bullish. This quarter was no different, with Trump-like phrases like ‘slaughter,’ ‘better and better,’ ‘game over,’ etc. “The good news for our now almost exactly 3-year-old buy rating is that Oracle’s execution has begun to catch up with its verbiage. Indeed, this was the first quarter in four in which Oracle did not scuffle somewhere — bookings, revenues, earnings or whatever. Investors are still jumpy after the January panic, so this means they are flocking to moneymakers like Oracle.” Oracle stock was up 4% in afternoon trading in the stock market today , near 40, and touched an eight-month high. Rivals  Microsoft ( MSFT ), Salesforce.com ( CRM ) and SAP ( SAP ) were up about 1% Wednesday afternoon. Not that Davis was totally giddy: “Should ORCL decisively penetrate the $40 price level, we will declare victory and seriously consider downgrading the stock from today’s buy to a possible hold.” What’s all the fuss? They can visualize Oracle’s cloud-revenue skyrocketing, while traditional database-software sales shrink. Oracle and its traditional enterprise-software customers have faced a tough conversion, but now Oracle is developing serious momentum with its own cloud and hybrid-cloud growth, shepherding the transition of its customers while absorbing the shrinkage of its still-dominant traditional enterprise sales. Oracle Acceleration Seen “With 310,000 on-premise database customers, the company sees an enormous potential TAM (total addressable market), as database customers continue to shift to the cloud,” said Evercore ISI analyst Kirk Materne in a research note Wednesday. “Management also noted that renewal rates were higher than in previous years.” Materne put annual recurring revenue from cloud software-as-a-service (SaaS) and platform-as-a-service (PaaS) sales up 77% in constant currency in Q3, with billings up 32%, “and importantly, this strength is expected to translate into accelerating revenue growth going forward,” he said. In Q3, Oracle said it added 942 new SaaS customers, more than half of which were Oracle Fusion ERP (enterprise resource planning) software subscribers. SaaS clients now total more than 11,000 with more than 2,000 on Fusion, Materne noted. Oracle sold customer experience (CX) SaaS to 465 new customers and 500 existing ones in Q3. Human capital management software was sold to 213 new customers. Oracle’s ERP Cloud attracted 334 new clients, “175 of which did not have an Oracle on-premise app before,” said Materne, for an installed base exceeding 1,800 clients. Still, for all the excitement of watching Oracle’s cloud revenue fly 40% to $735 million in Q3, that only amounted to 8% of Oracle’s total $9.01 billion in sales for the quarter. Revenue fell 3% from the year-earlier quarter. Traditional software revenue slipped to $6.34 billion from $6.64 billion, as the legacy line slipped to 70% from 71% of total revenue. Likewise, legacy hardware sales slipped to $1.13 billion, or 13% of Q3’s total sales, from $1.29 billion, or 14% a year before. “This is obviously a continuation of execution of their pivot toward the cloud pursuit,” Gartner analyst Charles “Chad” Eschinger told IBD via email. “Top line is better than I expected, even with the transition, especially with the increase in margins, where there have been many curmudgeons.”