Mid Cap Growth Style 4Q16: Best and Worst

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The Mid Cap Growth style ranks eighth out of the twelve fund styles as detailed in our 4Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Mid Cap Growth style ranked eighth as well. It gets our Neutral rating, which is based on an aggregation of ratings of nine ETFs and 356 mutual funds in the Mid Cap Growth style as of November 7, 2016. See a recap of our 3Q16 Style Ratings here.

Figure 1 ranks from best to worst all nine Mid-Cap Growth ETFs 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 19 to 1692). 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_ETFratings_MidCapGrowth4Q16

* 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_MidCapGrowth4Q16

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

Sources: New Constructs, LLC and company filings

Four stocks 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.

ALPS 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.

PowerShares DWA NASDAQ Momentum Portfolio (DWAQ) is the worst rated Mid Cap Growth ETF and Dreyfus Mid-Cap Growth Fund (FRSDX) is the worst rated Mid Cap Growth mutual fund. DWAQ earns a Neutral rating and FRSDX earns a Very Dangerous rating.

Foot Locker (FL: $66/share) is one of our favorite stocks held by IMIDX and it earns an Attractive rating. Foot Locker was a featured Long Idea in May 2015. Over the past decade, Foot Locker has grown after-tax profit (NOPAT) by 8% compounded annually. The company has improved its return on invested capital (ROIC) from 6% in 2006 to 10% over the last twelve months (TTM). Despite improvements to the underlying profitability of the business, FL remains undervalued. At its current price of $66/share, Foot Locker has a price-to-economic book value (PEBV) ratio of 1.0. This ratio means that the market expects FL’s NOPAT to never meaningfully grow over the remainder of its corporate life. If Foot Locker can grow NOPAT by just 5% compounded annually over the next decade, the stock is worth $93/share today– a 41% upside.

DISH Network Corp (DISH: $57/share) is one of our least favorite stocks held by PYSOX and earns a Dangerous rating. DISH’s economic earnings have fallen from $557 million in 2005 to -$35 million in 2015, and even further, to -$278 million TTM. The company’s ROIC has fallen from 26% in 2005 to 8% TTM. In light of the deteriorating fundamentals, DISH is significantly overvalued. To justify its current price of $57/share, DISH must grow NOPAT by 11% compounded annually for the next 13 years. This expectation seems overly optimistic given Dish’s declining profits over the last decade.

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_ETFratingsLandscape_MidCapGrowth4Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_MFratingsLandscape_MidCapGrowth4Q16

Sources: New Constructs, LLC and company filings

This article originally published here on November 7, 2016.

Disclosure: David Trainer, Kyle Guske and Kyle Martone 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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