Large Cap Growth Style 3Q16: Best and Worst

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The Large Cap Growth style ranks fourth out of the twelve fund styles as detailed in our 3Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Large Cap Growth style ranked sixth. It gets our Neutral rating, which is based on an aggregation of ratings of 17 ETFs and 666 mutual funds in the Large Cap Growth style as of July 28, 2016. See a recap of our 2Q16 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 17 to 671). 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_ETFratings_LargeCapGrowth3Q16

* 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_MFratings_LargeCapGrowth3Q16

* 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) and Destra Focused Equity Fund (DFOIX, DFOCX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

iShares Edge MSCI USA Quality Factor ETF (QUAL) is the top-rated Large Cap Growth ETF and City National Rochdale US Core Equity Fund (CNRUX) is the top-rated Large Cap Growth mutual fund. Both earn a Very Attractive rating.

ETFS Diversified-Factor US Large Cap Index Fund (SBUS) is the worst rated Large Cap Growth ETF and PACE Large Co Growth Equity Investments (PLAAX) is the worst rated Large Cap Growth mutual fund. SBUS earns a Neutral rating and PLAAX earns a Very Dangerous rating.

Alliance Data Systems Corp (ADS: $233/share) is one of our favorite stocks held by Large Cap Growth ETFs and mutual funds and earns an Attractive rating. Over the last decade, ADS has grown after-tax profit (NOPAT) by 19% compounded annually to $917 million in 2015. NOPAT has increased to $1.3 billion over the last twelve months. The company has improved its return on invested capital (ROIC) from 9% in 2005 to 12% over the last twelve months. Despite the improving fundamentals, the market has failed to value ADS fairly. At its current price of $233/share, ADS has a price-to-economic book value (PEBV) ratio of 1.0. This ratio means that the market expects ADS’ NOPAT to never meaningfully grow from current levels. If ADS can grow NOPAT by just 9% compounded annually for the next decade, the stock is worth $296/share today – a 27% upside.

Workday (WDAY: $80/share) is one of our least favorite stocks held by Large Cap Growth ETFs and mutual funds and earns a Dangerous rating. WDAY landed in the Danger Zone in April 2014 and business operations have not improved since. WDAY’s NOPAT has declined from -$105 million in 2013 to -$254 million in 2016, or -34% compounded annually. The company’s ROIC has not improved since 2013 and is still a bottom-quintile -14% over the last twelve months. Despite the clear deterioration in fundamentals, the stock remains up over 47% since its IPO in 2013, which has left shares greatly overvalued. To justify its current price of $80/share, WDAY must immediately achieve pre-tax margins of 10% (quite a jump from its current -21% over TTM) and grow revenue by 26% compounded annually for the next 16 years. In this scenario, WDAY would be generating over $46 billion in revenue in 16 years, or nearly equal to tech giant Cisco’s 2015 revenue.

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_ETFratingsLandscape_LargeCapGrowth3Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_MFratingsLandscape_LargeCapGrowth3Q16

Sources: New Constructs, LLC and company filings

This article originally published here on July 28, 2016.

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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