Sector Analysis 3Q16
The Industrials sector ranks third out of the ten sectors as detailed in our 3Q16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Industrials sector ranked first. It gets our Neutral rating, which is based on an aggregation of ratings of 20 ETFs and 22 mutual funds in the Industrials sector as of July 12, 2016. See a recap of our 2Q16 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 345). 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
* 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 S&P SmallCap Industrials Portfolio (PSCI) 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
* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
Rydex Series Transportation Fund (RYPIX, RYPAX, RYCNX, RYTSX), Fidelity Select Environment and Alternative Energy (FSLEX), and ICON Industrials Fund (ICTRX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.
iShares Transportation Average ETF (IYT) is the top-rated Industrials ETF and Fidelity Select Transportation Portfolio (FSRFX) is the top-rated Industrials mutual fund. IYT earns a Very Attractive rating and FSRFX earns an Attractive rating.
VanEck Vectors Environmental Services (EVX) is the worst rated Industrials ETF and Putnam Global Industrials Fund (PGIAX) is the worst rated Industrials mutual fund. EVX earns a Dangerous rating and PGIAX earns a Very Dangerous rating.
394 stocks of the 3000+ we cover are classified as Industrials stocks.
PACCAR Inc. (NASDAQ:PCAR: $51/share) is one of our favorite stocks held by Industrials ETFs and mutual funds and earns a Very Attractive rating. PACCAR is on July’s Most Attractive Stocks list. Since rebounding from the 2008-2009 economic crisis, PCAR has grown after-tax profit (NOPAT) by 32% compounded annually from 2010-2015. The company has improved its return on invested capital (ROIC) from 7% in 2010 to a top-quintile 19% over the last twelve months. Despite the solid growth in fundamentals, PCAR remains undervalued. At its current price of $50/share, PCAR has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means that the market expects PCAR’s NOPAT to decrease by 10% over the remaining life of the company. If PCAR can grow NOPAT by just 3% compounded annually for the next 10 years, the stock is worth $62/share today – a 24% upside.
Navigant Consulting, Inc. (NCI: $16/share) is one of our least favorite stocks held by Industrials ETFs and mutual funds and earns a Very Dangerous rating. NCI is on July’s Most Dangerous Stocks list. Over the past decade, NCI’s economic earnings have declined from -$49 million in 2005 to -$64 million in 2015. Worse yet, economic earnings have declined even further to -$85 million over the last twelve months and have never been positive in any year of our model, which dates back to 1998. NCI has never earned a quality ROIC. The best ROIC was 6% in 2006. Now, it earns a bottom-quintile 3% ROIC. Despite the clear deterioration of the business, NCI remains overvalued. To justify its current price of $16/share, NCI must grow NOPAT by 9% compounded annually for the next 15 years. For reference, NCI has grown NOPAT by less than 2% compounded annually over the last decade. Such high expectations already baked into the stock make NCI one to avoid.
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
Sources: New Constructs, LLC and company filings
Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds
Sources: New Constructs, LLC and company filings
Disclosure: David Trainer and Kyle Martone receive no compensation to write about any specific stock, sector or theme.