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

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The Mid Cap Growth style ranks ninth out of the twelve fund styles as detailed in our 2Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Mid Cap Growth style ranked ninth as well. It gets our Dangerous rating, which is based on aggregation of ratings of 10 ETFs and 360 mutual funds in the Mid Cap Growth style as of May 4, 2016. See a recap of our 1Q16 Style Ratings here.

Figure 1 ranks from best to worst the eight mid-cap growth ETFs that meet our liquidity standards and Figure 2 shows the five best and worst rated mid-cap growth mutual funds. Not all Mid Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 21 to 1593). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Mid 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_MidCapGrowthETFRatings_2Q16

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

Sources: New Constructs, LLC and company filings

Validea Market Legends ETF (VALX) and PowerShares DWA NASDAQ Momentum Portfolio (DWAQ) 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_MidCapGrowthMFRatings_2Q16

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

Sources: New Constructs, LLC and company filings

Barron’s 400 ETF (BFOR) is the top-rated Mid Cap Growth ETF and Congress Mid Cap Growth Fund (IMIDX) is the top-rated Mid Cap Growth mutual fund. Both earn a Very Attractive rating.

iShares Morningstar Mid-Cap Growth ETF (JKH) is the worst rated Mid Cap Growth ETF and Timothy Plan Aggressive Growth Fund (TAAGX) is the worst rated Mid Cap Growth mutual fund. JKH earns a Neutral rating and TAAGX earns a Very Dangerous rating.

Robert Half International (RHI: $39/share) is one of our favorite stocks held by IMIDX and earns an Attractive rating. Since 1998, Robert Half has grown after-tax profit (NOPAT) by 8% compounded annually. This profit growth has ramped up as of late, as RHI has grown NOPAT by 37% compounded annually over the past five years alone. The company has improved its return on invested capital (ROIC) from 8% in 2010 to a top-quintile 31% over the last twelve months. However, RHI is significantly undervalued. At its current price of $39/share, RHI has a price-to-economic book value (PEBV) ratio of 1.2. This ratio means that the market expects RHI’s NOPAT to grow only 20% over its remaining corporate life. If Robert Half International can grow NOPAT by just 9% compounded annually over the next decade, the stock is worth $60/share today – a 54% upside.

CoStar Group (CSGP: $195/share) is one of our least favorite stocks held by TWNAX and earns a Dangerous rating. Over the past five years, CoStar’s NOPAT has declined by 5% compounded annually. The company’s ROIC has fallen from 9% in 2010 to a bottom-quintile 2% over the last twelve months. Worst of all, in 15 of the last 18 years, CoStar Group has generated negative economic earnings. Despite the deterioration in the business, CSGP is priced for overly optimistic profit growth in the future. To justify its current price of $195/share, CSGP must grow NOPAT by 33% compounded annually for the next 16 years. Such lofty expectations give CSGP little upside potential but large downside risk, which makes it a stock to avoid.

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

Figure 3: Separating the Best ETFs From the Worst Funds

NewConstructs_MidCapGrowthETFLandscape_2Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_MidCapGrowthMFLandscape_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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