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

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Includes: ICRAX, PSL, SJM, VCSAX, VDC, WMT
by: David Trainer

Summary

The Consumer Staples sector ranks first in Q1'16.

Based on an aggregation of ratings of 9 ETFs and 15 mutual funds.

VDC is our top-rated Consumer Staples ETF and VCSAX is our top-rated Consumer Staples mutual fund.

The Consumer Staples sector ranks first out of the ten sectors as detailed in our Q1'16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Consumer Staples sector ranked first as well. It gets our Attractive rating, which is based on an aggregation of ratings of 9 ETFs and 15 mutual funds in the Consumer Staples sector. See a recap of our Q4'15 Sector Ratings here.

Figure 1 ranks from best to worst all nine Consumer Staples ETFs and Figure 2 shows the five best and worst-rated Consumer Staples mutual funds. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 17 to 116). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Consumer Staples sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. It is rare that one of the worst ETFs in this sector hold enough quality stocks to earn an Attractive-or-better rating.

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

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

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

The Vanguard Consumer Staples Index Fund ETF (NYSEARCA:VDC) is the top-rated Consumer Staples ETF and the Vanguard Consumer Staples Index Fund (MUTF:VCSAX) is the top-rated Consumer Staples mutual fund. VDC earns a Very Attractive rating and VCSAX earns an Attractive rating.

The PowerShares DWA Consumer Staples Momentum Portfolio (NASDAQ:PSL) is the worst-rated Consumer Staples ETF and the ICON Consumer Staples Fund (MUTF:ICRAX) is the worst-rated Consumer Staples mutual fund. PSL earns a Neutral rating and ICRAX earns a Very Dangerous rating.

121 stocks of the 3000+ we cover are classified as Consumer Staples stocks.

Wal-Mart Stores (NYSE:WMT) continues to be one of our favorite stocks held by VDC and earns an Attractive rating. Since 1998, Wal-Mart has been uniquely consistent in growing after-tax profit (NOPAT) by 9% compounded annually and earning a double-digit return on invested capital (ROIC), which is currently 11%. Additionally, Wal-Mart has generated over $57 billion, cumulatively, in free cash flow over the past five years. Overblown concerns about Wal-Mart's business model pushed the stock down over 25% last year, which has made shares greatly undervalued. At its current price of $64/share, WMT has a price to economic book value (PEBV) ratio of 0.8. This ratio means that the market expects Wal-Mart's NOPAT to permanently decline by 20%. However, if Wal-Mart can grow NOPAT by just 2% compounded annually over the next decade, the stock is worth $98/share today - a 53% upside.

The J.M. Smucker Company (NYSE:SJM) is one of our least favorite stocks held by ICRAX and earns a Dangerous rating. Over the past five years, J.M Smucker's NOPAT has declined by 2% compounded annually while its ROIC has fallen from 8% to 5%. Despite the deterioration of the business, SJM is up over 20% in the past two years, which has left shares significantly overvalued. To justify its current price of $122/share, SJM must grow NOPAT by 13% compounded annually for the next 12 years. This expectation seems awfully optimistic given SJM's inability to grow NOPAT at all in the past five years.

Figures 3 and 4 show the rating landscape of all Consumer Staples 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 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.

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