IB Traders Insight


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Stocks

Theme: Long U.S. Energy


Last week, commercial crude oil inventories rose by 1.7 million barrels. However, the downtrend of total stock remains intact. The news has done little over the past week to help the oil market.

Crude prices have once again been caught in a tailspin of supply/demand concerns as contango worsens. But the real story is about an emerging gasoline and distillates glut. Refiners, faced with record demand and a low profit margin environment, have been operating at higher capacity to churn out petroleum by-products. Though demand is high, it hasn’t been able to mop up excess distillate supplies. There are concerns that refiners will begin to process less crude oil, leading once again to crude oversupply. Some refiners may opt to continue producing at current capacity and try to export product, which could quell some concerns, although others may commence their seasonal shutdown earlier than usual. Recent warm weather could boost demand as well.

CRUDE OIL PRODUCTION VS. OIL INVENTORY VS. GASOLINE INVENTORY

http://i.icpro.co/Files/460/2EC216/11F64/36e1927af9084ecc8dd5e4c90bdb5bbe/0/160728+-+US+Energy+Theme+Update.png

On the producer and exploration side of things, the rig count seems to have bottomed, which only adds to the fear of oversupply. Going forward, there may be further short-term pressure on prices as anxiety spreads about the oil supply/demand balance tipping toward over-supplied once again. Over the intermediate to long-term, however, we see the oil market balance not only equilibrating but tipping toward under-supplied. Dropping oil exploration and production capex, diminished financing, lack of skilled employees, and a slow re-start of rigs in the face of rising demand will send prices higher. Our forecast is for crude prices to settle within the 60 - $80/bbl range.

Bottom Line: MRP continues to hold a bullish view of the U.S. energy sector.

Here's our original report recommending the sector: Implications of the Coming Shortage of oil.

McAlinden Research Partners' entire focus is on identifying change-driven thematic alpha opportunities. Subscribers receive the Daily Intelligence Briefing ("DIBs”) report which highlights important developments in a sector, industry or asset class. When a theme emerges, MRP's strategist includes a summary report, connecting the relevant points that provide the conviction to act now. The process was developed by Joe McAlinden, former CIO of Morgan Stanley Investment Management, to capture alpha opportunities that arise from disruptions to the status quo. You can also find out Joe's latest thoughts on the markets by reading his monthly Market Viewpoint. Click hereto read MRP's Research Disclaimer.
 

This article is from McAlinden Research Partners (MRP) and is being posted with MRP’s permission. The views expressed in this article are solely those of the author and/or MRP and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


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Macro

Bartender Kuroda Yells 'Last Call'


Bank of Japan governor is right to cut off officials and investors getting drunk on the punchbowl of liquidity.
 

Haruhiko Kuroda clearly has William McChesney Martin on the brain.

Bank of Japan Governor Kuroda disappointed markets Friday with a half-hearted increase in asset-buying programs. His move to boost purchases of exchange-traded funds by $58 billion fell way short of hopes for another monetary bazooka. Not by neglect, but as per Martin’s advice. Martin was Federal Reserve chairman from 1951 to 1970, during which he said his job was to “take away the punchbowl just as the party gets going.”

Central banks the world over have long forgotten that their role is that of monetary bartender. None more so than Kuroda, who’s been refilling the punchbowl and daring bankers, investors and businesses alike to keep up. Today, Kuroda remembered that his job comes with a modicum of responsibility - and sobriety - and essentially yelled “last call!” when he resisted calls for yet another a big easing move.

It’s hard to candy coat the angry how-dare-you phone calls Kuroda will be getting in the days ahead from Prime Minister Shinzo Abe’s team. But Kuroda is right to cut off government officials and investors getting drunk from his liquidity. Where, after all, has it gotten Asia’s No. 2 economy? Wages are stagnant, deflation is deepening, Japan’s competiveness is falling and Abe hasn’t implemented one single notable structural reform to hasten growth and raise living standards.

What mixologist Kuroda is telling Abe is that it’s time to sober up and get to work. Earlier this week, Abe announced a giant $265 billion stimulus package that, frankly, won’t revive growth, wages or confidence beyond the next two months. That’s exactly Kuroda’s point. For 25 years now, the BOJ and the Ministry of Finance have been adding monetary and fiscal uppers to enliven a rigid and bloated economy that barely responds.

Abe arrived on the scene three-and-half-years ago with a robust structural-reform push. He pledged to increase innovation, cut bureaucracy, tighten corporate governance, boost productivity and empower women. And then, Abe did exactly what his 10 predecessors all did: pressure the BoJ to ease and did zero to rebalance the economy.

This age-old strategy turned Japan into the ultimate monetary junkie, living monetary injection to injection. What Tokyo never quite got is that the amount of yen in the economy isn’t the problem, but uses for them. Without confidence that prospects will improve two to five years ahead, no one borrows, lends or speculates. It means the BoJ’s largess does little more than prop up government bonds.

That’s why Kuroda’s defiance today is so significant. He fully knew how much pressure there was for him to validate market expectations and placate politicians, and yet he refused to pour another round. Will Abe take the hint and do his job? All we can do is hope, considering how many times Abe has pledged to get serious only to punt again on big decisions. But given the surge in the yen, declining exports, and the return of deflation, Abe needs to put up or shut up about his reform plans.

The punchbowl Abe needs to fill is one of real wealth. He’s spelled out a fairly specific recipe for success, but stopped short at every turn to try it. Kuroda could do more, too, to monetize debt and expand asset purchases that boost confidence. But his reluctance to do so isn’t about laziness or cluelessness. Kuroda gets that easing further will imbibe the monetary junkies, but won’t end Japan’s 25-year malaise. Only a reformist cocktail of Abe’s making can boost growth to a level that’s eluded Japan for a quarter century.

Kuroda just made it clear it’s closing time. Will Abe take the hint or pound the bar for another punchbowl’s worth of yen? At least this much is for sure: it’s now Abe’s shout.

William Pesek is Executive Editor of Barron’s Asia. Based in Tokyo, he writes Barron’s Asia’s lead column “Up & Down Asia,” which covers economics, politics, markets and social issues throughout the Asia-Pacific region. He is the author of the 2014 book “Japanization: What the World Can Learn from Japan’s Lost Decades.” Before joining Barron’s, Mr. Pesek was Bloomberg View’s Asia columnist. His columns have appeared in the International Herald Tribune, the Sydney Morning Herald, the New York Post, the Straits Times, and many other publications. Follow him on Twitter @WilliamPesek.

Get investing analysis that moves stocks and markets—Subscribe to Barron’s for just $1 a week.

This article is from Barron's and is being posted with Barron’s permission. The views expressed in this article are solely those of the author and/or Barron's and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


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Stocks

Nasdaq Market Intelligence Desk - Equity Market Insight July 29, 2016


As of 11:30 AM EDT:

NASDAQ Composite +0.34% Dow -0.02% S&P 500 +0.25% Russell 2000 +0.29%
NASDAQ Advancers: 1173 / Decliners: 1006
Today’s Volume:  -2.7%

In impressive fashion, equity markets are holding up despite disappointing US economic data as well as an announcement from the Bank of Japan on a stimulus package which appears to have fallen short of the market’s expectations. 

  • On the data front the US economy expanded less than forecast with Q2 GDP +1.2%, well below consensus expectations of +2.5%.  In addition Q1 GDP was revised down to 0.8% from 1.1%.  Immediately following the results both rates and the US Dollar declined as markets anticipate a lower for longer policy from the Federal Reserve. 
  • The US Dollar Index is down 1.37%, its third largest decline in 2016 while the 10-year UST yield is back below 1.50%, last 1.475%.  Crude oil which is down 20% from its June highs started today’s session in the red but found support at the 200-day simple moving average and is now green.  WTI oil last traded at $41.48, +$0.34 from yesterday’s close. 
  • Congratulations to Talend SA for going public today, and currently trading higher by ~40%! Nice Work and welcome to the Nasdaq family of listed companies!
     

Technical Take:

The USDJPY currency pair is down 2.5% so far in today’s session following the Bank of Japan’s decision on monetary policy which appears to have fallen short of market expectations.  The yen is widely viewed as a barometer of risk and often moves in sync with equities.  The below chart illustrates the relatively strong correlation between the USDJPY (white line) and the S&P 500 (yellow line) over the prior four years, however a divergence has been emerging since early March when equities rebounded but the USDJPY trended lower.  Even with today’s strength in the yen, the S&P500 is near flat compared to yesterday’s close, just ten points away from all-time highs.  While the divergence between the two asset classes can continue, equity investors should be aware that August is a notoriously poor month for stocks.  In fact August ranks as the worst performing month over the prior five and twenty years, and the 2nd worst performing month going all the way back to 1951.  Is the yen the canary in the coal mine? 

 

Nasdaq's Market Intelligence Desk (MID) Team includes:  
Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.
Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.

This article is from Nasdaq and is being posted with Nasdaq’s permission. The views expressed in this article are solely those of the author and/or Nasdaq and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Stocks

DJ Tech Highlights: Citrix, LogMeIn Agree to Merge Virtual-Meeting Operations


EXCLUSIVE ANALYSIS AND NEWS BEATS

In This Issue:

  • Market-moving news: Citrix looks to merge its GoTo division with LogMeIn and Liberty Media makes an offer to Pandora with an eye toward merging it with Sirius XM
  • Exclusive news: The EU files a fourth round of antitrust charges against Google; BlackBerry launches a second Android-powered phone; Tesla says it’s sticking with its Autopilot feature; and more
  • Unique analysis on heavier taxes on the likes of Zipcar and Car2Go car sharing than on Uber and Lyft ride hailing; and private equity’s change of heart on tech

Market-Moving News

Citrix, LogMeIn Agree to Merge Virtual-Meeting Operations

On July 26. we reported minutes ahead of an official announcement that Citrix Systems had agreed to merge its virtual-meeting division with LogMeIn.

  • The deal is to be structured as a so-called Reverse Morris Trust, a tax-free transaction that has been popular of late as companies look to slim down and become more focused.
  • The deal values LogMeIn at $1.8 billion, a slight premium to the company’s market value at the close of trading on July 26. LogMeIn’s share price rose by as much as 11% in the last minutes of trade.
  • Citrix had already said it would spin off the business, known as GoTo, in a tax-free deal in the second half of the year. GoTo had revenue of about $600 million in the 12 months ended September. 


Liberty Media Makes an Informal Offer for Pandora

Dow Jones reported exclusively on July 21 that Liberty Media CEO Greg Maffei had made an offer to internet radio company Pandora Media for around $15 a share, valuing the company around $3.4 billion.

  • If the two parties come to terms, Liberty Media could combine Pandora with Sirius XM, which it controls through a 64% stake. Pandora would instantly give Sirius scale in streaming, with 80 million listeners who mostly tune in on their mobile phones.
  • Pandora rejected the informal offer because it believes the company’s true value is closer to what it was in the fall, when the shares were trading around $20, a source told us.
  • Despite Pandora’s rejection of the bid, its share price rose by as much as 7.3% after we reported on Mr. Maffei’s overture.

Exclusive News

EU Files Formal Antitrust Charges Against Google

Dow Jones was first to report, on July 14, that the European Union was getting ready to file additional charges against Alphabet Inc.’s Google.

  • This marked the fourth round of formal charges in just over a year, threatening the Silicon Valley company with years of litigation on multiple fronts.
  • We published our article ahead of the European Commission’s so-called statement of objections, which accused Google of breaching EU antitrust rules by restricting how a website that offers a Google search function can show advertisements sold by other companies.
  • The latest charges augment formal accusations in April that Google abuses the dominance of its Android mobile-operating system by “strong-arming” smartphone makers and telecom firms into pre-installing its search engine as the default on mobile devices. Each case could lead to fines of up to 10% of Google’s revenue and orders to change its behavior. 

BlackBerry Launches Second Android-Powered Smartphone

We were first to report on July 26 that the Canada-based formerly undisputable smartphone-market leader unveiled its second Android-powered phone, doubling down on efforts to revive its struggling handset business.

  • BlackBerry’s new device, called DTEK50, will retail for $299, and offers a 5.2-inch screen and all-touch keyboard. The company has loaded the phone with proprietary encryption technology to protect photos, contacts and other data against cyberattacks. 
  • Earlier in July, the company announced plans to stop making its Classic smartphone, fueling speculation that it may abandon its proprietary operating system. The company, however, says it is committed to BB10.
  • BlackBerry’s handset business is running at a loss. Some analysts have called on the company to give up on its handsets, which account for less than 1% of the global smartphone market, to focus only on higher-margin mobile-security software and related services. But the company is still hoping to turn a profit, in part by combining its oft-noted security features with a richer app environment.
  • BlackBerry’s first android phone, the Priv, was hampered by a hefty price tag, $699, as well as by  longer-than-expected contract talks with U.S. carrier Verizon Wireless.


Tesla Sticking With Autopilot Feature

On July 12, we followed up our scoop from the previous day on Tesla being investigated for a possible securities-law breach with an Elon Musk interview. The Tesla chief executive said he has no plans to disable the Autopilot function in the wake of a May crash of a Model S electric and instead plans to redouble efforts to educate customers on how the feature works.

  • Tesla’s self-driving system is widely regarded as among the more aggressive applications currently on the market. Mr. Musk said, he pushed hard to launch the feature as soon as possible because “we knew we had a system that on balance would save lives.”
  • The May 7 crash in Florida killed 40-year-old Joshua Brown, a Model S owner who was using the self-driving system at the time of the accident. It was the first-known fatality connected to the Autopilot system.
  • The company is planning an explanatory blog post that highlights how Autopilot works as a safety system and what drivers are expected to do after they activate it. “A lot of people don’t understand what it is and how you turn it on,” Mr. Musk said.

 

More Exclusive News

Read more about the scoops discussed above and listed below at http://djhub.dowjones.net/scoops.

  • July 26—Tsinghua Unigroup had merged with XMC, combining two main Chinese projects to build advanced-memory-chip plants.
  • July 25—Apple was calling upon Bob Mansfield to head up the company’s fledgling automobile project. Mr. Mansfield previously led the engineering development that turned out products including the MacBook Air laptop computer, the iMac desktop computer, and the iPad tablet.
  • July 22—Apollo Global was weighing an initial public offering of Presidio Holdings, an IT firm it bought less than two years earlier. A listing could value it at more than $2 billion, including debt, sources said.
  • July 15—KKR and Warburg Pincus were considering an investment in Indonesian motorcycle-hailing app Go-Jek that would value the startup at more than $1 billion.
  • July 14—Xerox had rejected a proposed merger deal of its document business with R.R. Donnelley & Sons.
  • July 8—Uber had raised $1.15 billion from a new high-yield loan, bringing the amount the taxi-hailing startup has raised in debt and equity to more $15 billion and helping its existing shareholder base to avoid stock dilution.
  • July 5—Tencent was trying to lure big-name investors to join it in its $8.6 billion acquisiton of Supercell Oy, including China’s sovereign wealth fund (CIC) and the Canada Pension Plan Investment Board. It was forecasting a 36% per-annum return over the next four years.
  • July 5—KKR had agreed to buy business software company Epicor Software from Apax Partners.
  • July 1—Apple was lookig to acquire Tidal, a streaming-music service run by Jay Z, seeking to buttress its Apple Music service with popular artists linked to the rap mogul such as Kanye West and Madonna.
  • June 28—Messaging app Line had set its IPO range between  2,700 and 3,200 yen for its Tokyo debut, which proved a boon to early investors when the share price rose by 32% when trading began a couple weeks later.


Unique Analysis

Car-Sharing Sector Fares Poorly vs. Ride-Hailing When It Comes to Taxes

The taxi industry has been complaining since the inception of ride-hailing apps that it faces a far heavier regulatory burden than ride-hailing services, but recent research shows that another new-economy sector is also feeling the pinch: car-sharing, Josh Zumbrun reported on July 22.

  • In recent years, cities have increased taxes on the car-sharing industry but not the ride-hailing industry, according to researchers at DePaul University's Chaddick Institute for Metropolitan Development.
  • Of the 40 largest U.S. cities, 29 apply taxes of more than 10% on one-hour car-sharing trips, including nine cities with effective tax rates above 30%, the study showed. By contrast, most cities don't collect retail taxes on ride-hailing.
  • This is because car-sharing companies are treated as car-rental companies, for which taxes are often applied on a flat basis, meaning the percentage is much higher for one-hour transactions. This additional burden makes car sharing a more expensive option compared with taking Uber or Lyft for a trip across town even though there’s no labor charge.
  • This raises the interesting question of how self-driving taxi-like services will be taxed. If driverless cars are treated as rentals they would face the same hefty tax burden; if treated as chauffeurs, taxes could be low.


Private Equity Has a Crush on Tech

Technology companies have become the most popular target of buyout firms hunting for stable businesses that could outperform even if the U.S. economy falls into a recession, Matt Jarzemsky explained in an analytical story on June 30.

  • In the first half of 2016, tech companies accounted for 46% of all U.S. buyouts, the sector's highest level since at least 1995, when data provider Dealogic started keeping track.  This compares with just 11% in 2012.
  • Tech is the traditional preserve of venture capitalists, who look for promising companies to bankroll and build up. Private-equity firms on the other hand typically buy underperforming companies, fix them up and sell them for a profit in five years or so. For decades, PE firms shied away from tech companies, citing the blistering pace of technological advances. But over the past several years they have become comfortable with corners of tech that they see as relatively stable, such as corporate-software providers.
  • The recent surge in tech buyouts has been a bright spot in an otherwise sluggish market for private-equity deal making, which is down sharply from the boom years before the financial crisis. 

About This Newsletter

This weekly newsletter covers Central Banks, Deals, Resources and Technology topics on a rotating basis. Next week: Central Banks.

If you have questions about Dow Jones and The Wall Street Journal, visit us online or email service@dowjones.com.  

If you have questions about the content of this newsletter, email Jacques van Wersch at jacques.vanwersch@dowjones.com.  


About Dow Jones

Dow Jones & Company is a global provider of news and business information, delivering content to consumers and organizations via newspapers, Web sites, apps, video, newsletters, magazines, proprietary databases, conferences, and radio.

Dow Jones Newswires delivers premium business news, commentary and insight in real time and with unquestionable accuracy and depth. Built on a renowned global reporting network of nearly 2,000 journalists, Dow Jones Newswires publishes more than 16,000 daily news items – including exclusive content from The Wall Street Journal, Barron’s and MarketWatch – covering every asset class and key regions and markets worldwide.

This article is from Dow Jones & Company (Dow Jones) and is being posted with Dow Jones' permission. The views expressed in this article are solely those of the author and/or Dow Jones and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Stocks

The Best and Worst of the Consumer Staples Sector 3Q16


Sector Analysis 3Q16

The Consumer Staples sector ranks first out of the ten sectors as detailed in our 3Q16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Consumer Staples sector ranked third. It gets our Neutral rating, which is based on an aggregation of ratings of nine ETFs and 14 mutual funds in the Consumer Staples sector as of July 12, 2016. See a recap of our 2Q16 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 15 to 114). 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.

Figure 1: ETFs with the Best & Worst Ratings – Top 5

NewConstructs_ETFratings_ConsStaples_3Q16

* 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

NewConstructs_MFratings_ConsStaples_3Q16

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

Sources: New Constructs, LLC and company filings

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

iShares US Consumer Goods ETF (IYK) is the top rated Consumer Staples ETF and Vanguard Consumer Staples Index Fund (VCSAX) is the top rated Consumer Staples mutual fund. IYK earns a Very Attractive rating and VCSAX earns an Attractive rating.

First Trust Consumer Staples AlphaDEX Fund (FXG) is the worst rated Consumer Staples ETF and ICON Consumer Staples Fund (ICRAX) is the worst rated Consumer Staples mutual fund. FXG earns a Neutral rating and ICRAX earns a Very Dangerous rating.

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

Tenneco Inc. (TEN: $45/share) is one of our favorite stocks held by FSAVX and earns a Very Attractive rating. Since 2009, Tenneco has grown after-tax profit (NOPAT) by 25% compounded annually. Tenneco has improved its return on invested capital (ROIC) over this same time, from 4% in 2009 to 11% over the last twelve months. Despite the improving operations, TEN remains undervalued. At its current price of $45/share TEN has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means that the market expects TEN’s NOPAT to permanently decline by 10%. If Tenneco can grow NOPAT by just 5% compounded annually for the next five years, the stock is worth $72/share today – a 60% upside.

Seneca Foods Corp (SENEA: $36/share) is one of our least favorite stocks held by Consumer Staples ETFs and mutual funds and earns a Dangerous rating. Since going public in 2006, SENEA’s NOPAT has actually declined by 0.2% compounded annually. SENEA’s ROIC has declined from 7% in 2006 to a bottom-quintile 3% over the last twelve months. Despite the deteriorating profitability, SENEA remains overvalued. To justify its current price of $36/share, SENEA must grow NOPAT by 10% compounded annually for 15 years. This expectation seems optimistic given SENEA’s profit decline since 2006.

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

NewConstructs_ETFratingsLandscape_ConsStaples_3Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_MFratingsLandscape_ConsStaples_3Q16

Sources: New Constructs, LLC and company filings

This article originally published here on July 12, 2016.

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

 

About New Constructs

QUESTION: Why shouldn’t mutual fund research be as good as stock research? Why should fund investors rely on backward-looking price trends?
ANSWER: They should not.

Don’t judge a mutual fund by its cover. Take a look inside at its holdings and understand the quality of earnings and valuation of the stocks it holds. We enable you to choose the best fund based on its stock-picking merits so you do not have to rely solely on backward-looking technical metrics. 

The figure below details the drivers of our forward-looking Rating system for mutual funds. The drivers of our predictive rating system are Portfolio Management and Total Annual Costs. The Portfolio Management Rating (details here) is the same as our Stock Rating (details here) except that we incorporate Asset Allocation (details here) in the Portfolio Management Rating. The Total Annual Costs Rating (details here) captures the all-in cost of being in a fund over a 3-year holding period, the average period for all mutual fund investors.

Cutting-edge technology enables us to scale our forensics accounting expertise so that we can cover enough stocks to cover the ETFs that hold them as well. Learn more about New Constructs. Get a free trial. See what Barron’s has to say about our research. 

This article is from New Constructs, LLC and is being posted with New Constructs, LLC’s permission. The views expressed in this article are solely those of the author and/or New Constructs, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Disclosures

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