The Best and Worst of the Industrials Sector 2Q16

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Sector Analysis 2Q16

The Industrials sector ranks first out of the ten sectors as detailed in our 2Q16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Industrials sector ranked second. It gets our Neutral rating, which is based on aggregation of ratings of 20 ETFs and 17 mutual funds in the Industrials sector as of April 15, 2016. See a recap of our 1Q16 Sector Ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the sector. Not all Industrials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 343). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Industrials 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

NewConstructs_IndustrialsETFrating_2Q16

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

Sources: New Constructs, LLC and company filings

U.S. Global Jets ETF (JETS) and EcoLogical Strategy ETF (HECO), and Guggenheim S&P 500 Equal Weight Industrials (RGI) 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_IndustrialsMFrating_2Q16

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

Sources: New Constructs, LLC and company filings

Five mutual funds are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums. See our mutual fund screener for more details.

iShares US Industrials ETF (IYJ) is the top-rated Industrials ETF and Fidelity Select Transportation Portfolio (FSRFX) is the top-rated Industrials mutual fund. IYJ earns a Very Attractive rating and FSRFX earns an Attractive rating.

Market Vectors Environmental Services ETF (EVX) is the worst rated Industrials ETF and ICON Industrials Fund (ICIAX) is the worst rated Industrials mutual fund. Both earn a Dangerous rating.

403 stocks of the 3000+ we cover are classified as Industrials stocks.

JetBlue Airways (JBLU: $21/share) is one of our favorite stocks held by FSRFX and earns an Attractive rating. Over the past decade, JetBlue has grown after-tax profit (NOPAT) by an impressive 30% compounded annually. The company has improved its return on invested capital (ROIC) from 2% in 2005 to 11% in 2015. The company has also quadrupled its NOPAT margin from 3% to 12% over this same timeframe. Despite the strong fundamentals, JBLU is undervalued. At its current price of $21/share, JBLU has a price-to-economic book value (PEBV) ratio of 1.0. This ratio means that the market expects JetBlue’s NOPAT to never increase from current levels. If JetBlue can grow NOPAT by just 12% compounded annually for the next decade, the stock is worth $47/share today – a 123% upside.

Clean Harbors (CLH: $50/share) is one of our least favorite stocks held by ICIAX and earns a Very Dangerous rating. CLH is also on April’s Most Dangerous Stocks list. Over the past five years, Clean Harbors’ NOPAT has declined by 1% compounded annually. Its ROIC has fallen from a once impressive 13% in 2010 to a bottom-quintile 4% in 2015. However, in a disconnect with the business fundamentals, the stock is up 26% over the past three months and shares are largely overvalued. To justify its current price of $50/share, CLH must grow NOPAT by 13% compounded annually for the next 18 years. Such lofty expectations make it clear why CLH in on this month’s most dangerous stocks list and should be avoided.

Figures 3 and 4 show the rating landscape of all Industrials ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst ETFs

NewConstructs_IndustrialsETFlandscape_2Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_IndustrialsMFlandscape_2Q16

Sources: New Constructs, LLC and company filings

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

Click here to download a PDF of this report.

Photo Credit: Margalit Francus (Flickr)

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