Industrials Sector 4Q16: Best and Worst

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Sector Analysis 4Q16

The Industrials sector ranks fourth out of the ten sectors as detailed in our 4Q16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Industrials sector ranked third. It gets our Neutral rating, which is based on an aggregation of ratings of 20 ETFs and 16 mutual funds in the Industrials sector as of October 14, 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 Industrials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 346). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Industrials 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_ETFratings_Industrials4Q16

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

Sources: New Constructs, LLC and company filings

U.S Global Jets ETF (JETS), EcoLogical Strategy ETF (HECO), and PowerShares DWA Industrials Momentum (PRN) 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_MFratings_Industrials4Q16

* 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.

State Street SPDR S&P Homebuilders ETF (XHB) is the top-rated Industrials ETF and Fidelity Select Defense and Aerospace Portfolio (FSDAX) is the top-rated Industrials mutual fund. Both earn an Attractive rating.

VanEck Vectors Environmental Services ETF (EVX) is the worst rated Industrials ETF and ICON Industrials Fund (ICIAX) is the worst rated Industrials mutual fund. EVX earns a Dangerous rating and ICIAX earns a Very Dangerous rating.

393 stocks of the 3000+ we cover are classified as Industrials stocks.

Greenbrier Companies, Inc. (GBX: $37/share) is one of our favorite stocks held by Industrials ETFs and mutual funds and earns a Very Attractive rating. GBX is on September’s Exec Comp Linked to ROIC list as well. Since 2011, GBX has grown after-tax profit (NOPAT) by 61% compounded annually to $271 million in 2015 and to $320 million over the last twelve months (TTM). The company has improved its return on invested capital (ROIC) from 4% in 2011 to a top-quintile 22% TTM. Despite the improvement in the fundamentals of the business, GBX remains undervalued. At its current price of $37/share, GBX has a price-to-economic book value (PEBV) ratio of 0.4. This ratio means that the market expects GBX’s NOPAT to permanently decrease by 60%. If GBX can grow NOPAT by just 1% compounded annually for the next decade, the stock is worth $51/share today – a 38% upside.

Encore Wire Corp (WIRE: $36/share) is one of our least favorite stocks held by Industrials ETFs and mutual funds and earns a Very Dangerous rating. WIRE is on October’s Most Dangerous Stocks list as well. Over the past decade, WIRE’s NOPAT has declined by 14% compounded annually to $16 million in 2015 and declined further, to $10 million TTM. The company’s ROIC has fallen from 40% in 2006 to a bottom-quintile 2% over the last twelve months. Despite the clear deterioration of the business, WIRE remains priced for significant profit growth. To justify its current price of $36/share, WIRE must grow NOPAT by 15% compounded annually for the next 14 years. This expectation seems rather optimistic given WIRE’s declining NOPAT over the past decade.

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

Figure 3: Separating the Best ETFs From the Worst ETFs

NewConstructs_ETFratingsLandscape_Industrials4Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_MFratingsLandscape_Industrials4Q16

Sources: New Constructs, LLC and company filings

This article originally published here on October 14, 2016.

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

Click here to download a PDF of this report.

Photo Credit: Freaktography (Flickr)

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