All Cap Value Style 3Q16: Best and Worst

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The All Cap Value style ranks fifth out of the twelve fund styles as detailed in our 3Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the All Cap Value style ranked fourth. It gets our Neutral rating, which is based on aggregation of ratings of ten ETFs and 295 mutual funds in the All Cap Value style as of July 28, 2016. See a recap of our 2Q16 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 13 to 2048). 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

NewConstructs_ETFratings_AllCapValue3Q16

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

Sources: New Constructs, LLC and company filings

WeatherStorm Forensic Accounting Long-Short ETF (FLAG) and SPDR S&P 1500 Value TILT 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

NewConstructs_MFratings_AllCapValue3Q16

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

Sources: New Constructs, LLC and company filings

First Trust Large Cap AlphaDEX Fund (FTA) is the top-rated All Cap Value ETF and BMO Large-Cap Value Fund (BLCRX) is the top-rated All Cap Value mutual fund. Both earn a Very Attractive rating.

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.

The Travelers Companies, Inc. (TRV: $117/share) is one of our favorite stocks held by DIVIX and earns an Attractive rating. TRV was featured as a Long Idea in November 2014 and remains undervalued. Over the past decade, Travelers has grown after-tax profit (NOPAT) by 5% compounded annually. Over the same time, the company has improved its return on invested capital (ROIC) from 8% in 2005 to 11% during the last twelve months (TTM). Despite the improvement and strength of business fundamentals, TRV is undervalued. At its current price of $117/share, TRV has a price-to-economic book value (PEBV) ratio of 0.7. This ratio means the market expects TRV’s NOPAT to permanently decline by 30%. If TRV can grow NOPAT by just 4% compounded annually for the next decade the stock is worth $221/share today- an 88% upside.

Level 3 Communications, Inc. (LVLT: $53/share) is one of our least favorite stocks held by MLUAX and earns a Very Dangerous rating. Level 3 has never generated positive economic earnings in any year of our model, which dates back to 1998. Over the past five years alone, the company has burned through cumulative -$8.4 billion in free cash flow and currently earns a 6% ROIC. Despite its inability to create shareholder value, LVLT is priced for significant profit growth moving forward. To justify its current price of $53/share, LVLT must grow NOPAT by 10% compounded annually for the next 11 years. This expectation seems too optimistic given the company’s history of shareholder value destruction.

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

NewConstructs_ETFratingsLandscape_AllCapValue3Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_MFratingsLandscape_AllCapValue3Q16

Sources: New Constructs, LLC and company filings

This article originally published here on July 29, 2016.

Disclosure: David Trainer 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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