The Small Cap Blend style ranks tenth out of the twelve fund styles as detailed in our 4Q16 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 as of November 9, 2016. See a recap of our 3Q16 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

Small Cap Blend Style

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

Sources: New Constructs, LLC and company filings

Validea Market Legends ETF (VALX) and Victory CEMP US Discovery Enhanced Volatility ETF (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

Small Cap Blend Style

* 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 (TNA) are below $100 million and do not meet our liquidity minimums. See our mutual fund screener for more details.

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

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

Sanderson Farms (SAFM: $92/share) is one of our favorite stocks held by EES and earns an Attractive rating. SAFM was also a featured Long Idea in August 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 (CLI: $25/share) 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

Small Cap Blend Style

Sources: New Constructs, LLC and company filings

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

Small Cap Blend Style

Sources: New Constructs, LLC and company filings

Small Cap Blend Style

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.

Article by Kyle Martone, New Constructs