The Best and Worst of the Large Cap Growth Style 2Q16

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The Large Cap Growth style ranks sixth out of the twelve fund styles as detailed in our 2Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Large Cap Growth style ranked fifth. It gets our Neutral rating, which is based on aggregation of ratings of 18 ETFs and 649 mutual funds in the Large Cap Growth style as of May 3, 2016. See a recap of our 1Q16 Style Ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Large Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 16 to 681). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Large Cap Growth 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_LargeCapGrowthETFRatings_2Q16

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

Sources: New Constructs, LLC and company filings

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

NewConstructs_LargeCapGrowthMFRatings_2Q16

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

Sources: New Constructs, LLC and company filings

Nuveen Growth Fund (NSRGX, NBGRX, NSRCX) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

WBI Tactical LCS Shares (WBIL) is the top-rated Large Cap Growth ETF and Pioneer Disciplined Growth Fund (INYDX) is the top-rated Large Cap Growth mutual fund. Both earn a Very Attractive rating.

iShares MSCI USA Momentum Factor ETF (MTUM) is the worst rated Large Cap Growth ETF and NASDAQ-100 ProFund (OTPSX) is the worst rated Large Cap Growth mutual fund. MTUM earns a Neutral rating and OTPSX earns a Very Dangerous rating.

Foot Locker (FL: $62/share) remains one of our favorite stocks held by WBIL and earns an Attractive rating. Foot Locker was also featured as a Long Idea in May 2015. Over the past five years, Foot Locker has grown after-tax profit (NOPAT) by 23% compounded annually. The company has improved its return on invested capital (ROIC) from 3% in 2010 to 11% in 2016 while NOPAT margins have increased from 5% to 10% over the same time frame. Despite the improving fundamentals, FL remains a bargain. At its current price of $62/share, Foot Locker has a price-to-economic book value (PEBV) ratio of 1.0. This ratio means that the market expects Foot Locker’s NOPAT never to meaningfully grow from its current levels. If Foot Locker can grow NOPAT by just 7% compounded annually over the next five years, the stock is worth $87/share today – a 40% upside.

Workday (WDAY: $75/share) remains one of our least favorite stocks held by Large Cap Growth ETFs and mutual funds and earns a Dangerous rating. Workday was put in the Danger Zone in April 2014, and the situation has only worsened. Since 2013, Workday’s NOPAT has declined from -$105 million to -$254 million. The company’s ROIC has never been positive and is currently a bottom-quintile -13%. The NOPAT margin is an astonishingly low -22%. Despite the clear problems in the business model, the market still overvalues WDAY. To justify its current price of $75/share, Workday must immediately achieve 8% NOPAT margins (compared to -22% in the last twelve months) and grow revenue by 26% compounded annually for 15 years. In this scenario, the company would be generating $36.8 billion in revenue 15 years from now, which nearly equals tech giant Oracle’s 2015 revenue. It seems clear that the expectations already baked into WDAY are overly optimistic.

Figures 3 and 4 show the rating landscape of all Large Cap Growth ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

NewConstructs_LargeCapGrowthETFLandscape_2Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_LargeCapGrowthMFLandscape_2Q16

Sources: New Constructs, LLC and company filings

Disclosure: David Trainer and Kyle Guske II 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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