Consumer Discretionary Sector 4Q16: Best and Worst

Sector Analysis 4Q16

The Consumer Discretionary sector ranks second out of the ten sectors as detailed in our 4Q16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Consumer Discretionary sector ranked second as well. It gets our Attractive rating, which is based on an aggregation of ratings of 13 ETFs and 19 mutual funds in the Consumer Discretionary sector as of October 6, 2016. See a recap of our 3Q16 Sector ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the sector. Not all Consumer Discretionary sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 386). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Consumer Discretionary 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_ConsDisc_ETFratings_4Q16

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

Sources: New Constructs, LLC and company filings

Guggenheim S&P 500 Equal Weight Consumer Discretionary (RCD) and PowerShares Dynamic Retail Portfolio (PMR) 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_ConsDisc_MFratings_4Q16

* 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.

PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) is the top-rated Consumer Discretionary ETF and Fidelity Leisure Portfolio (FDLSX) is the top-rated Consumer Discretionary mutual fund. Both earn a Very Attractive rating.

PowerShares Dynamic Media Portfolio (PBS) is the worst rated Consumer Discretionary ETF and Rydex Leisure Fund (RYLSX) is the worst rated Consumer Discretionary mutual fund. PBS earns a Neutral rating and RYLSX earns a Dangerous rating.

436 stocks of the 3000+ we cover are classified as Consumer Discretionary stocks.

Movado Group (MOV: $21/share) is one of our favorite stocks held by Consumer Discretionary ETFs and mutual funds and earns a Very Attractive rating. Over the past decade, Movado has grown after-tax profit (NOPAT) by 5% compounded annually. Movado has improved its return on invested capital (ROIC) from 9% in 2006 to 13% over the last twelve months (TTM). Despite the fundamental improvement, the stock remains undervalued. At its current price of $21/share, MOV has a price to economic book value (PEBV) ratio of 0.7. This ratio means the market expects MOV’s profits to permanently decline by 30%. If MOV can grow NOPAT by just 3% compounded annually for the next decade, the stock is worth $38/share today – an 81% upside.

Expedia (EXPE: $119/share) is one of our least favorite stocks held by Consumer Discretionary ETFs & mutual funds and earns a Dangerous rating. Expedia was also featured in the Danger Zone in September 2015. Since 2010, Expedia’s NOPAT has declined 2% compounded annually to $457 million in 2015, and further declined to $226 million TTM. Similarly, the company’s ROIC has declined from 8% in 2010 to a bottom-quintile 3% TTM. Despite the deteriorating fundamentals, EXPE remains priced for significant profit growth. To justify its current price of $119/share, EXPE must immediately achieve 2015 pre-tax margins of 9% (compared to 4% TTM), and grow NOPAT by 16% compounded annually for the next 11 years. This expectation seems rather optimistic given the profit decline EXPE has experienced over the past five years.

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

Figure 3: Separating the Best ETFs From the Worst ETFs

NewConstructs_ConsDisc_ETFratingsLandscape_4Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_ConsDisc_MFratingsLandscape_4Q16

Sources: New Constructs, LLC and company filings

This article originally published here on October 6, 2016.

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

Click here to download a PDF of this report.

Photo Credit: Caius Gracchus (Flickr)

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