Best And Worst Funds: Consumer Discretionary Sector

by: David Trainer

The Con­sumer Dis­cre­tionary sec­tor ranks fourth out of the ten major sec­tors as detailed in our sec­tor roadmap. It gets my Neu­tral rat­ing, which, like my fund rat­ings, is based on aggre­ga­tion of stock rat­ings for each of the 470+ com­pa­nies in the sector.

The prob­lem with Con­sumer Dis­cre­tionary stocks in an ane­mic eco­nomic envi­ron­ment is that many of them will suf­fer as con­sumers and busi­nesses cut back on non-essential prod­ucts and ser­vices. Investors must tread care­fully when mak­ing invest­ments in this sec­tor. Per pre­vi­ous arti­cles, the best sec­tors for find­ing stocks are Tech­nol­ogy and Con­sumer Sta­ples, both of which get my Attrac­tive rating.

If you choose to shop for invest­ments in the Con­sumer Sta­ples sec­tor, keep in mind that there are no Attractive-rated ETFs or mutual funds. Com­par­a­tively, there are plenty of Attractive-or-better rated stocks, which make up over 30% of the value of the sec­tor. It appears that the man­agers of funds in this sec­tor are not doing a good job of pick­ing good stocks.

There are 44 funds to chose from within the Con­sumer Dis­cre­tionary sec­tor, and they are all very dif­fer­ent. Per Fig­ure 1, the num­ber of hold­ing varies widely (from 25 to 368), which cre­ates dras­ti­cally dif­fer­ent invest­ment impli­ca­tions and rat­ings. Here is the full list of 44 funds.

How do investors pick the right fund out of the sea of choices that will deliver the best returns?

Fig­ure 1: Funds with Most & Least Hold­ings - Top 5

(Click to enlarge)

Sources: New Con­structs, LLC and com­pany filings

To iden­tify the best funds within a given cat­e­gory, investors need a pre­dic­tive rat­ing based on analy­sis of the under­ly­ing qual­ity of stocks in each fund. See Figure 2.

Our pre­dic­tive fund rat­ings are based on aggre­gat­ing our stock rat­ings on each of the fund's hold­ings and all of the fund's expenses. Investors deserve forward-looking fund research that is com­pa­ra­ble in qual­ity to stock research.

Investors should not rely on backward-looking research of past per­for­mance for invest­ment decisions.

Fig­ure 2 shows the five best and worst-rated funds for the sec­tor. The best funds allo­cate more value to Attractive-or-better-rated stocks than the worst funds and vice versa. In addi­tion, my rat­ings account for the total annual cost of invest­ing in a fund or ETF.

One of my favorite stocks in the Con­sumer Dis­cre­tionary sec­tor is AutoZone (NYSE:AZO), which gets my Very Attrac­tive rat­ing. The fund that allo­cates the most to AZO is Fidelity Select Port­fo­lios: Retail­ing Port­fo­lio [FSRPX]. Per Fig­ure 2, it is my top-rated fund in the sec­tor even though it gets a Neu­tral rat­ing. FSRPX would earn a bet­ter rat­ing if it held more stocks like AZO. It is one of the few stocks that ben­e­fits from a weak eco­nomic envi­ron­ments as more peo­ple look to fix their vehi­cles them­selves rather than pay the pre­mium for some­one else to do it. Like all Very Attrac­tive stocks, AutoZone has an impres­sive ROIC of 25% and a low expec­ta­tions for future cash flows, i.e. a cheap valuation.

One of my least favorite Con­sumer Dis­cre­tionary stocks is Wyn­d­ham World­wide (NYSE:WYN), which gets my Very Dan­ger­ous rat­ing. Not sur­pris­ingly, the fund that allo­cates the most to WYN is not a favorite either as it gets my Dan­ger­ous rat­ing: Fidelity Select Port­fo­lios: Leisure Port­fo­lio [FDLSX]. WYN has an aston­ish­ingly expen­sive val­u­a­tion for a com­pany in a busi­ness based almost entirely on dis­cre­tionary spend­ing. Its cur­rent stock price (~$40/share) implies the com­pany will grow its prof­its at 15% com­pounded annu­ally for over 20 years. That is set­ting the bar way too high for my taste.

Fig­ure 2: Funds with the Best & Worst Rat­ings - Top 5

* MF des­ig­nates Mutual Funds and ETF des­ig­nates Exchange-Traded Funds

Sources: New Con­structs, LLC and com­pany filings

Investors should not buy any Con­sumer Dis­cre­tionary funds. None of the 44 funds for the sec­tor allo­cate enough value to Attractive-or-better-rated stocks to earn an Attrac­tive over­all rat­ing. Fig­ure 3 shows the rat­ing land­scape of all ETFs and mutual funds in the Con­sumer Dis­cre­tionary sector.

Fig­ure 3: Sep­a­rat­ing the Best Funds From the Worst

(Click to enlarge)

Sources: New Con­structs, LLC and com­pany filings

Fig­ure 4 offers addi­tional details on the qual­ity of funds in the sec­tor. Note the large dif­fer­ence between the num­ber and value of stocks ver­sus funds that are Attractive-or-better-rated. Fund man­agers in this sec­tor are not doing a good job of pick­ing stocks.

Fig­ure 4: Con­sumer Dis­cre­tionary Fund Land­scape Details

Sources: New Con­structs, LLC and com­pany filings

Fig­ure 5 lists our Pre­dic­tive Fund Rat­ing for the 5 largest and most pop­u­lar Con­sumer Dis­cre­tionary funds.

Fig­ure 5: Five Largest Con­sumer Dis­cre­tionary Funds

* MF des­ig­nates Mutual Funds and ETF des­ig­nates Exchange-Traded Funds

* Analy­sis uses the top-ranked class for each fund

Sources: New Con­structs, LLC and com­pany filings

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.