Best And Worst Q1'16: Industrials ETFs, Mutual Funds And Key Holdings

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Includes: CGI, FSRFX, ICIAX, IYT, LSTR, PKB
by: David Trainer

Summary

The Industrials sector ranks second in Q1'16.

Based on an aggregation of ratings of 20 ETFs and 23 mutual funds.

IYT is our top-rated Industrials ETF and FSRFX is our top-rated Industrials mutual fund.

The Industrials sector ranks second out of the ten sectors as detailed in our Q1'16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Industrials sector ranked third. It gets our Neutral rating, which is based on aggregation of ratings of 20 ETFs and 23 mutual funds in the Industrials sector. See a recap of our Q4'15 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 348). 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

Click to enlarge

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

Sources: New Constructs, LLC and company filings

The U.S. Global Jets ETF (NYSEARCA:JETS), the Guggenheim S&P 500 Equal Weight Industrials ETF (NYSEARCA:RGI), and the Huntington EcoLogical Strategy ETF (NYSEARCA:HECO) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums.

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

Click to enlarge

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

Sources: New Constructs, LLC and company filings

The Fidelity Select Environment and Alternative Energy Portfolio (MUTF:FSLEX) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums.

The iShares Transportation Average ETF (NYSEARCA:IYT) is the top-rated Industrials ETF and the Fidelity Select Transportation Portfolio (MUTF:FSRFX) is the top-rated Industrials mutual fund. Both earn a Very Attractive rating.

The PowerShares Dynamic Building & Construction Portfolio ETF (NYSEARCA:PKB) is the worst-rated Industrials ETF and the ICON Industrials Fund (MUTF:ICIAX) is the worst-rated Industrials mutual fund. PKB earns a Neutral rating and ICIAX earns a Dangerous rating.

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

Landstar System (NASDAQ:LSTR) is one of our favorite stocks held by IYT and earns an Attractive rating. Over the past decade, Landstar has grown after-tax profit (NOPAT) by 7% compounded annually. LSTR improved its already high 18% return on invested capital (ROIC) in 2004 to a top-quintile 22% ROIC on a trailing twelve months basis. Despite the consistent strength in its business, LSTR is undervalued. At its current price of $59/share, LSTR has a price to economic book value (PEBV) ratio of 1.1. This ratio means that the market expects Landstar to grow NOPAT by only 10% over its remaining corporate life. If Landstar can continue to grow NOPAT by just 7% compounded annually over the next decade, the stock is worth $72/share today - a 22% upside.

Celadon Group (NYSE:CGI) is one of our least favorite stocks held by Industrials ETFs and mutual funds. Celadon was placed in the Danger Zone in November 2015 and is a competitor to Landstar. Since 2009, Celadon's reported earnings have been extremely misleading. Despite net income growing from $2 million in 2009 to $37 million in 2015, Celadon's economic earnings have declined from -$16 million to -$25 million over the same timeframe. The disconnect comes from Celadon's failed acquisitions, which have helped grow EPS while destroying shareholder value, something known as the high-low fallacy. Even though CGI is down 50% since our initial Danger Zone report, it still remains overvalued. To justify its current price of $9/share, Celadon must grow NOPAT by 8% compounded annually for the next 11 years. While this may not seem like a high rate of profit growth, keep in mind that over the past decade, CGI has only grown NOPAT by 3% compounded annually.

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

Click to enlarge

Sources: New Constructs, LLC and company filings

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

Click to enlarge

Sources: New Constructs, LLC and company filings

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

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.