Identifying strategies that consistently generate alpha in volatile markets is challenging, but possible. With the right research tools, investors can find the right stocks and the right funds for outperformance in any market. We’re not saying it’s easy. We’re saying it is worth the effort. Plus, the alternative is to rely on Wall Street’s hype machine that incessantly pushes investors to buy, buy, buy no matter the environment. You deserve better.

Ultimately, investment success depends on the quality of data and analysis employed. Calculating true economic earnings and looking beyond simplistic accounting metrics is key to uncovering real value.

After a thorough review of over 7,600 ETFs and mutual funds under our coverage, we’ve identified a Very Attractive-rated fund that selects stocks based on economic fundamentals instead of accounting distortions.

The information below comes from the recent Long Idea report on this mutual fund, available to Pro and Institutional members. You can buy the full report a la carte here. We hope you enjoy this unique mutual fund research. No other firm comes close to matching our diligence. Feel free to share with friends and colleagues. And, let us know what you think.

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Forward-Looking Research Reveals a Very Attractive Fund

While Morningstar gives this mutual fund a 1-Star rating, our analysis of its holdings reveals the fund allocates more to high-quality stocks, i.e. profitable companies with undervalued stock prices, than its benchmark, iShares Core S&P U.S. Value ETF (IUSV). See Figure 2 in full report.

We leverage our Robo-Analyst technology to assess a mutual fund’s portfolio quality by analyzing the fund’s individual stock holdings.

Through this rigorous analysis, we find that the mutual fund allocates 43% of its assets to Attractive-or-better rated stocks compared to just 16% for IUSV. On the flip side, the mutual fund allocates just 9% of its assets to Unattractive-or-worse rated stocks compared to 35% for IUSV.

Per Figure 3 in the full report, our holdings analysis also reveals the mutual fund’s portfolio is of much higher quality than the S&P 500 as represented by State Street SPDR S&P 500 ETF Trust (SPY). SPY earns our Attractive rating, but only 10% of SPY’s portfolio is allocated to stocks rated Attractive-or-better and 33% is allocated to stocks rated Unattractive-or-worse.

Quality Stocks Drive Very Attractive Risk/Reward Rating

Figure 4 in the full report contains our detailed rating for the mutual fund, which includes each of the criteria we use to rate all mutual funds under coverage. These criteria are the same for our Stock Rating Methodology, because the performance of a mutual fund’s holdings drives the performance of the mutual fund. Figure 4 in the full report also compares the mutual fund’s rating with those of its benchmark and SPY.

This mutual fund’s holdings are superior or equal to its benchmark in all five and superior or equal to SPY in four out five of the criteria that make up our Portfolio Management rating. Specifically:

  • The fund’s holdings generate positive economic earnings, same as the benchmark and SPY.
  • The fund’s ROIC is 22% and higher than the 16% earned by IUSV’s holdings, but lower than the 33% earned by SPY’s holdings.
  • The fund’s free cash flow (FCF) yield of 4% is higher than the benchmark and SPY’s at 2%.
  • The price-to-economic book value (PEBV) ratio for the fund’s holdings is 1.9, which is much lower than the benchmark at 2.5 and SPY’s at 3.3.
  • Our discounted cash flow analysis reveals an average market implied growth appreciation period (GAP) of just 30 years for the fund’s holdings compared to 51 years for the benchmark and 68 years for SPY.

The takeaway?

Market expectations for stocks held by this mutual fund imply profits will grow much less than the stock’s held by IUSV (measured by PEBV ratio and the market-implied GAP).

The mutual fund’s profitability is higher (measured by ROIC), yet the stocks held by the mutual fund are significantly cheaper (as measured by PEBV and the market-implied GAP). High profitability + cheap valuations = quality risk/reward.

…there’s much more in the full report. You can buy the report a la carte here.

Or, become a Professional or Institutional member – they get all Long Idea reports.

I’ll keep sending information on quality sectors, industries, or specific companies until you’re ready to start your membership, but know that we expect this pick to outperform.

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