All Cap Value Style 4Q16: Best and Worst

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The All Cap Value style ranks fifth out of the twelve fund styles as detailed in our 4Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the All Cap Value style ranked fifth as well. It gets our Neutral rating, which is based on an aggregation of ratings of 10 ETFs and 330 mutual funds in the All Cap Value style as of October 25, 2016. See a recap of our 3Q16 Style Ratings here.

Figure 1 ranks from best to worst the eight All-Cap value ETFs that meet our liquidity standards and Figure 2 shows the five best and worst rated All-Cap value mutual funds. Not all All Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 2036). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the All 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

AllCapValue_ETFRating* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

WeatherStorm Forensic Account ETF (FLAG) and State Street SPDR S&P 1500 Value ETF (VLU) are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5

AllCapValue_MFRating* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Unified Symons Value Fund (SAVIX) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

First Trust Large Cap Value Fund (FTA) is the top-rated All Cap Value ETF and Fidelity Value Discovery Fund (FVDKX) is the top-rated All Cap Value mutual fund. FTA earns an Attractive rating and FVDKX earns a Very Attractive rating.

ETF Series Solutions Deep Value ETF (DVP) is the worst rated All Cap Value ETF and American Beacon Mid-Cap Value Fund (ABMAX) is the worst rated All Cap Value mutual fund. DVP earns a Neutral rating and ABMAX earns a Very Dangerous rating.

JPMorgan Chase & Company (JPM: $69/share) is one of our favorite stocks held by FVDKX and earns an Attractive rating. Over the past decade, JPM has grown after-tax profit (NOPAT) by 10% compounded annually. The company has improved its return on invested capital (ROIC) from 4% in 2005 to 9% over the last twelve months (TTM). Despite the improvement in fundamentals, JPM remains undervalued. At its current price of $69/share, JPM has a price-to-economic book value (PEBV) ratio of 1.0. This ratio means the market expects JPM’s NOPAT to never grow over the remaining life of the firm. If JPM can grow NOPAT by just 4% compounded annually over the next decade, the stock is worth $82/share today – a 19% upside.

Farmer Brothers Company (FARM: $32/share) is one of our least favorite stocks held by All Cap Value funds and earns a Very Dangerous rating. FARM is on October’s Most Dangerous Stocks list. Over the past decade FARM’s economic earnings, the true cash flows of the business, have declined from -$12 million in 2006 to -$21 million TTM. The company currently earns a bottom-quintile ROIC of 1% and has burned through cumulative $36 million in free cash flow over the past five years. Despite the inability to create true shareholder value, FARM remains overvalued. To justify its current price of $32/share, FARM must grow NOPAT by 33% compounded annually for the next 12 years. This expectation sees rather optimistic for even the most profitable firms in the world, much less one that has failed to create shareholder value for the past 10 years.

Figures 3 and 4 show the rating landscape of all, All Cap Value ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

AllCapValue_ETFLandscapeSources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Funds

AllCapValue_MFLandscapeSources: New Constructs, LLC and company filings

This article originally published here on October 26, 2016.

Disclosure: David Trainer, Kyle Guske and Kyle Martone receive no compensation to write about any specific stock, style, or theme.

Click here to download a PDF of this report.

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