The Best And Worst Of The All Cap Growth Style 2Q16 by Kyle Guske II, New Constructs
The All Cap Growth style ranks eighth out of the twelve fund styles as detailed in our 2Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the All Cap Growth style ranked seventh. It gets our Neutral rating, which is based on aggregation of ratings of 17 ETFs and 547 mutual funds in the All Cap Growth style as of April 29, 2016. See a recap of our 1Q16 Style Ratings here.
Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all All Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 13 to 2185). This variation creates drastically different investment implications and, therefore, ratings.
Investors seeking exposure to the All Cap Growth style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.
Figure 1: All Cap Growth Style 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
Five ETFs are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums. See our ETF screener for more details.
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
PNC Large Cap Growth Fund (PEWIX, PEWCX) and Catalyst/Lyons Hedged Premium Return Fund (CLPFX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.
iShares Core US Growth ETF (IUSG) is the top-rated All Cap Growth ETF and Eaton Vance Atlanta Capital Select Equity Fund (ESEIX) is the top-rated All Cap Growth mutual fund. IUSG earns an Attractive rating and ESEIX earns a Very Attractive rating.
Calamos Focus Growth ETF (CFGE) is the worst rated All Cap Growth ETF and ACM Dynamic Opportunity Fund (ADOAX) is the worst rated All Cap Growth mutual fund. CFGE earns a Neutral rating and ADOAX earns a Very Dangerous rating..
Gilead Sciences (GILD: $88/share) is one of our favorite stocks held by MNNYX and earns a Very Attractive rating. Gilead has grown after-tax profit (NOPAT) by 39% compounded annually since 2005. Over the same time, Gilead has increased its return on invested capital (ROIC) from 37% in 2005 to a top-quintile 88% in 2015. Over the past five years, Gilead has generated a cumulative $26 billion in free cash flow. Despite the operational successes, GILD remains undervalued. At its current price of $88/share, GILD has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means that the market expects Gilead’s NOPAT to permanently decline by 40%. However, if Gilead can grow NOPAT by just 4% compounded annually for the next five years, the stock is worth $183/share today – a 107% upside.
DexCom (DXCM: $64/share) is one of our least favorite stocks held by KAUBX and earns a Dangerous rating. Over the past decade, DexCom’s NOPAT has declined from -$37 million to -$54 million. The company’s ROIC has been negative in every year since IPO and is currently a bottom quintile -28%. Nevertheless, DXCM is priced as though the company will achieve high levels of profitability. To justify its current price of $64/share, DXCM must immediately achieve 5% pre-tax margins (from -13% in 2015) and grow revenue by 31% compounded annually for the next 17 years. We feel it should be clear just how overvalued DXCM is at the current price.
Figures 3 and 4 show the rating landscape of all All Cap Growth ETFs and mutual funds.
Figure 3: Separating the Best ETFs From the Worst Funds
Sources: New Constructs, LLC and company filings
Figure 4: Separating the Best Mutual Funds From the Worst Funds
Sources: New Constructs, LLC and company filings
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.
