Subscribers got access to this report one month early. For a limited time, you can get access to all our actionable reports before they are made available to the public, along with Most Attractive, Most Dangerous Stocks or Best & Worst ETFs & Mutual Funds newsletters for as little as $9.99/month.
The Energy sector ranks eighth out of the ten sectors as detailed in my Sector Rankings for ETFs and Mutual Funds report. It gets my Dangerous rating, which is based on aggregation of ratings of 20 ETFs and 94 mutual funds in the Energy sector as of July 17, 2014. Prior reports on the best & worst ETFs and mutual funds in every sector are here.
Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Energy sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 23 to 167). This variation creates drastically different investment implications and, therefore, ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst ETFs and mutual funds, which allocate too much value to Neutral-or-worse-rated stocks.
To identify the best and avoid the worst ETFs and mutual funds within the Energy sector, investors need a predictive rating based on (1) the stocks ratings of the holdings, (2) the all-in expenses of each ETF and mutual fund, and (3) the fund’s rank compared to all other ETFs and mutual funds. As a result, only the cheapest funds with the best holdings receive Attractive or better ratings. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.
Investors should not buy any Energy ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long historyof not paying off. Here’s the list of our top-rated Energy stocks
Get my ratings on all ETFs and mutual funds in this sector on my mutual fund and ETF screener.
Figure 1: ETFs with the Best & Worst Ratings – Top 5
* 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
* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
Voya Global Natural Resources Fund (IRGNX) and Voya Global Natural Resources Fund (IGNWX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.
Van Eck Market Vectors Oil Services (OIH) is my top-rated Energy ETF and Fidelity Select Portfolios: Energy Service Portfolio (FSESX) is my top-rated Energy mutual fund. Both earn my Neutral rating.
Direxion Daily Natural Gas Related Bull 3x Shares ETF (GASL) is my worst-rated Energy ETF and Northern Lights Fund Trust: Ascendant Natural Resources Fund (NRGAX) is my worst-rated Energy mutual fund. Both earn my Very Dangerous rating.
Figure 3 shows that 11 out of the 356 stocks (only 2% of the market value) in Energy ETFs and mutual funds get an Attractive-or-better rating. At the same time, zero out of 20 Energy ETFs and zero out of 94 Energy mutual funds get an Attractive-or-better rating.
The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and Energy ETFs hold poor quality stocks.
Figure 3: Energy Sector Landscape For ETFs, Mutual Funds & Stocks
Sources: New Constructs, LLC and company filings
As detailed in “Cheap Funds Dupe Investors”, the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good portfolio management.
Investors need to tread carefully when considering Energy ETFs and mutual funds, as the sector is littered with Dangerous-or-worse funds. No ETFs or Energy mutual funds in the Energy sector allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating. Investors would be better-off investing in individual stocks.
CVR Energy Inc. (CVI) is one of my favorite stocks held by FENY and earns my Attractive rating. Since 2009, CVI has grown profits (NOPAT) by 35% compounded annually. Over the same time period, the company increased return on invested capital (ROIC) from 10% in 2009 to 18% in 2013, which is in the top quintile of all companies I cover. The company has continued this growth into 2014 and investors have taken note via the 27% increase in CVI’s stock price since February. The good news for investors is that CVI still remains undervalued. CVI’s current price of ~$49/share gives the stock a price to economic book value (PEBV) ratio of 1.3. This number implies the company will never grow NOPAT more than 20% above its current level. This expectation seems too pessimistic considering that CVI has been growing profits by 35% compounded annually for the last 4 years. We believe CVI will exceed the expectations implied by its current price.
ConocoPhillips (COP) is one of my least favorite stocks held by Energy ETFs and mutual funds and earns my Dangerous rating. Over the past six years, COP’s NOPAT has declined by 9% compounded annually while the company’s ROIC has fallen from 8% to 6%. Also, COP has generated negative economic earnings for four of the last five years. Despite COP’s weak history, the stock price is up over 30% since February, mainly on the back of strong quarterly earnings reports. This run up in the stock price has caused COP to become overvalued. To justify its current price of ~$81/share, COP would need to grow NOPAT by 5% compounded annually for the next 11 years. A 5% compounded annual NOPAT growth rate may not seem high, but COP has not seen more than two consecutive years of profit growth since 2007. Market expectations look overly optimistic compared to this company’s lack of profit growth in the past.
186 stocks of the 3000+ I cover are classified as Energy stocks.
Figures 4 and 5 show the rating landscape of all Energy ETFs and mutual funds.
My Sector Rankings for ETFs and Mutual Fundsreport ranks all sectors and highlights those that offer the best investments.
Figure 4: Separating the Best ETFs From the Worst ETFs
Sources: New Constructs, LLC and company filings
Figure 5: Separating the Best Mutual Funds From the Worst Mutual Funds
Sources: New Constructs, LLC and company filings
Review my full list of ratings and rankings along with reports on all 20 ETFs and 94 mutual funds in the Energy sector.
Kyle Guske II contributed to this report.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.