Best And Worst Q4'16: Small Cap Blend ETFs, Mutual Funds And Key Holdings

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Includes: BOSOX, BRDAX, CLI, EES, RWK, SAFM
by: David Trainer

Summary

The Small Cap Blend style ranks tenth in Q4'16.

Based on an aggregation of ratings of 24 ETFs and 749 mutual funds.

EES is our top-rated Small Cap Blend ETF and BOSOX is our top-rated Small Cap Blend mutual fund.

The Small Cap Blend style ranks tenth out of the twelve fund styles as detailed in our Q4'16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Small Cap Blend style ranked tenth as well. It gets our Dangerous rating, which is based on an aggregation of ratings of 24 ETFs and 749 mutual funds in the Small Cap Blend style. See a recap of our Q3'16 Style Ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Small Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 21 to 2110). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Small Cap Blend 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

Click to enlarge

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

Sources: New Constructs, LLC and company filings

The Validea Market Legends ETF (NASDAQ:VALX) and the Victory CEMP US Discovery Enhanced Volatility ETF (NASDAQ:CSF) 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

Click to enlarge

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

Sources: New Constructs, LLC and company filings

Four mutual funds are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums.

The WisdomTree SmallCap Earnings ETF (NYSEARCA:EES) is the top-rated Small Cap Blend ETF and the Boston Trust Small Cap Fund (MUTF:BOSOX) is the top-rated Small Cap Blend mutual fund. EES earns an Attractive rating and BOSOX earns a Very Attractive rating.

The Oppenheimer Mid Cap Revenue ETF (NYSEARCA:RWK) is the worst rated Small Cap Blend ETF and the B. Riley Diversified Equity Fund (MUTF:BRDAX) is the worst rated Small Cap Blend mutual fund. RWK earns a Dangerous rating and BRDAX earns a Very Dangerous rating.

Sanderson Farms (NASDAQ:SAFM) is one of our favorite stocks held by EES and earns an Attractive rating. SAFM was also a featured Long Idea in September 2015. Over the past decade, Sanderson Farms has grown after tax profit (NOPAT) by 12% compounded annually. The company has improved its return on invested capital (ROIC) from 7% in 2012 to 13% over the trailing twelve months (TTM). Despite the improvement in the underlying economics of the business, SAFM remains undervalued. At its current price of $92/share, SAFM has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects SAFM's NOPAT to permanently decline by 10%. If SAFM can grow NOPAT by just 3% compounded annually over the next decade, the stock is worth $140 today - a 52% upside.

Mack-Cali Reality Corp (NYSE:CLI) is one of our least favorite stocks held by TFSSX and earns a Very Dangerous rating. Over the five years alone, CLI's NOPAT has declined from $210 million in 2011 to -$15 million TTM. The company's ROIC has fallen from 5% in 2011 to a bottom-quintile 0% TTM. Worse yet, CLI has not generated positive economic earnings in any year of our model, which dates back to 1998. Despite the deteriorating fundamentals, CLI remains overvalued. To justify its current price of $26/share, CLI must immediately achieve 10% NOPAT margins (compared to -3% TTM) and grow revenue by 15% compounded annually for the next 17 years.

Figures 3 and 4 show the rating landscape of all Small Cap Blend ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

Click to enlarge

Sources: New Constructs, LLC and company filings

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

Click to enlarge

Sources: New Constructs, LLC and company filings

This article originally published here on November 8, 2016.

Disclosure: David Trainer, Kyle Guske and Kyle Martone receive no compensation to write about any specific stock, style, 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.