In January, we published “Rotating Regimes – What to Plan For in 2023.” At that time, we recounted that the 2022 US Stock Market was a conflagration that wiped out almost everything in its path with the exception of a few industries and ETFs. At that time, we reported that two Benchmark ETFs we track, the Nasdaq-100 ETF (QQQ) and the Russell 1000 Growth ETF (IWF), both had ValuEngine high 4 (Buy) ratings for forecast 1-year and 6-month returns. Both had dropped 30% in 2022 and our predictive model called for rebounds with six-month returns of better than 4%. Those two predictions appear to have been strong calls thus far. Both thus far in 2023 show returns above 15%.
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The bad news for high-tech growth investors is that following these impressive run-ups, our model indicates that ETFs based upon indexes with large weighting in high-tech growth may have gotten ahead of themselves at this juncture year-to-date. We now rate QQQ a 1 (Strong Sell) with a rating of 2, just slightly better, for IWF, the large cap growth ETF. Both are now expected to give back more than 5% of these gains in the next twelve months. To underscore the underlying reason, XLK, the Select Technology Sector ETF that is even more concentrated in large cap tech than QQQ, is also rated 1 (strong sell) and projected to lose more than 6% of its current price during the next twelve months.
Perhaps an even more daunting observation is that the iShares S&P 500 ETF, IVV, is now rated 2 (Sell) and is projected to lose nearly 5% during the next six months. This is noteworthy because it is almost always rated 3 (hold) since it is based upon the most commonly used market barometer and intuitively connotes the center of the investable universe. Another rare occurrence is that all 10 of its 10 top-weighted holdings are rates 2 (Sell). Does that mean that the ValuEngine predictive model is bearish on the entire stock market? Not at all, in fact it is telling that RSP, the Invesco Equal Weighted S&P 500 ETF – containing the identical 500 stocks – is rated 3 (hold), consistent with the norm. As we will see in the following benchmark ETF review, there are a number of attractive size and style indexes according to the VE model right now. It follows therefore that there are also plenty of stocks. It’s just that those opportunities are almost all outside of large cap growth right now.
The ETF reports on ValuEngine for ETFs that follow market benchmarks provide a side benefit in writing market analyses. They are a window to implicit forecasts for 3-, 6- and 12-month forecasts VE models are making for each benchmark’s ETF portfolio. This is because the ratings and projections combine bottom-up constituent analysis with analyses of the historical price movements of the ETF in different market environments. This empowers us to provide both looking back and share our model’s views on that which lies ahead.
The benchmark indexes and ETFs analyzed here are:
- The S&P 500 Index representing US Large Cap, the ETF is iShares’ IVV.
- The S&P 400 MidCap Index representing US MidCap; the ETF is SPDR’s MDY;
- The Russell 2000 Index representing US Small Cap; the ETF is iShares IWM;
- The Russell 1000 Large Cap Value Index; the ETF is iShares’ IWD;
- The Nasdaq-100, constructed as an index using the top 100 non-financial stocks with primary listing on the Nasdaq, but now regarded as the premier US Big Tech Index; the ETF is Invesco QQQ.
- In most quarters, we use a column to represent IWF, Russell Large Cap Growth. Since we’ve already covered that it is rated very similarly to QQQ exposures right now, and we’ve identified a cap and style segment ETF that is currently rated 5 (Strong Buy), we substitute the Russell 2000 Small Cap Value ETF (IWN) for IWF in today’s analysis. We also have the aforementioned Invesco equally weighted S&P 500 ETF (RSP) to show the contrast in forecasts and valuations attributable solely to the weighting scheme. Again, it is unusual to capture this much of a dispersion between the two.
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
All historical data are as of 04/09/2023.
| IWD | IWN | IWM | MDY | QQQ | RSP | IVV | |
| Market Index Being Tracked | Russell Large Cap Value | Russell 2000 Small Cap Value | Russell 2000 Small Cap | S&P Midcap | Invesco
Nasdaq 100 |
Invesco Equal-Weighted S&P 500 | iShares S&P 500 |
| ValuEngine Rating | 3 | 5 | 4 | 4 | 1 | 3 | 2 |
| Forecast 3-mo. Price Return | +0.27% | +1.13% | +0.62% | 0.89% | -0.49% | +0.20% | -0.28% |
| Forecast 6-Mo. Price | +2.50% | +4.95% | +3.02% | +2.91% | +1.63% | +2.40% | +1.81% |
| Forecast 1-yr. Price Return | -2.51% | +0.80% | -0.28% | -1.73% | -5.90% | -3.24% | -4.90% |
| Historic 1 mo. Price Return | -2.54% | -9.71% | -7.85% | -6.49% | +6.01% | -3.86% | +1.10% |
| Historic 3 mo. Price Return | -1.92% | -5.81% | -2.08% | -1.65% | +18.32% | -1.47% | +5.43% |
| Historic 6 mo. Price Return | +7.34% | -1.06% | +0.10% | +5.36% | +13.69% | +7.34% | +9.67% |
| Historic 12-month Price Return | -7.80% | -15.06% | -13.10% | -6.60% | -9.97% | -8.32% | -8.36% |
| Historic 5-Yr Ann. Price Return | +4.77% | +2.34% | +0.10% | +5.36% | +13.90% | +7.48% | 8.75% |
| Volatility | 19.34% | 25.71% | 24.46% | 22.90% | 22.20% | 20.91% | 18.90% |
| Sharpe Ratio | 0.25 | 0.09 | 0.13 | 0.26 | 0.63 | 0.36 | 0.46 |
| Beta | 0.97 | 1.19 | 1.17 | 1.14 | 1.11 | 1.07 | 1.00 |
| # of Stocks | 851 | 1363 | 1924 | 400 | 100 | 500 | 503 |
| Undervalued by VE % | 50% | 75% | 72% | 50% | 33% | 40% | 40% |
| P/B Ratio | 2.3 | 1.4 | 2.0 | 2.3 | 6.2 | 2.9 | 3.8 |
| P/E Ratio | 16.4 | 24.2 | 30.5 | 14.8 | 27.0 | 18.6 | 19.8 |
| P/S Ratio | 6.1 | 1.9 | 5.3 | 2.3 | N/A | 6.3 | 6.6 |
| Div. Yield | 2.2% | 2.3% | 1.6% | 1.4% | 0.8% | 1.8% | 1.6% |
| Expense Ratio | 0.18% | 0.23% | 0.19% | 0.23% | 0.20% | 0.20% | 0.03% |
| Largest Holding Pct. | Exxon Mobil Corp (XOM)
2.6% VE2 |
Agree Realty (ADC) 0.6%
VE3 |
Shockwave Med (SWAV)
0.4%, VE1 |
AXON Enterprise (AXON),
0.70%, VE2 |
Microsoft (MSFT)
12.6% VE2 |
Intel
(INTC) 0.24% VE1 |
Apple (AAPL)
5.98% VE3 |
| Index Provider | FTSE Russell Indices | FTSE Russell Indices | FTSE Russell Indices | S&P Dow Jones | Nasdaq | S&P Dow Jones | S&P Dow Jones |
| ETF Sponsor | iShares by Blackrock | iShares by Blackrock | iShares by Blackrock | SPDRs by SSgA | Invesco | Invesco | SPDRs by SSgA |
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Standout Stocks from the ETFs Included in this Analysis:
There is one 4-rated (Buy) stock according to the ValuEngine model that is in the top-ten holdings of both IWN and IWM. This stock is RBC Bearings (RBC). RBC Bearings Incorporated manufactures and markets engineered precision bearings and components in the United States and internationally. It operates through two segments, Aerospace/Defense and Industrial and is headquartered in Oxford, CT, having been incorporated in 1919.
There is a 5-rated (Strong Buy) stock in IWM that gets our top prediction for year-ahead performance,16.56%. This stock is Aspen Aerogels (ASPN). Aspen Aerogels, Inc. is an energy technology company that designs, develops and manufactures aerogel insulation used primarily in large-scale energy infrastructure facilities. The Company offers insulation for high temperature steam pipes, vessels, and equipment. Aspen serves petrochemical, refinery, industrial, and power generation sectors. It manufactures Cryogel (R), Pyrogel (R) and Spaceloft (R) products. The firm was founded in 2001 and is headquartered in Northborough, MA.
Another 5-rated (Strong Buy) stock that we also project a 16% gain is Enviva Corp, EVA, The firm produces, processes, and sells utility-grade wood pellets. The company’s products are used as a substitute for coal in power generation, and combined heat and power plants. Enviva Inc. was incorporated in 2013 and is headquartered in Bethesda, Maryland.
The highest market cap company in IWM that is rated 5 (strong buy) and pays a dividend is probably the most familiar name in the group, Kemper Corp (KMPR). It is a diversified US insurance holding company that engages in the provision of insurance products to three segments: Specialty Property & Casualty Insurance, Preferred Property & Casualty Insurance, and Life & Health Insurance. The company was formerly known as Unitrin, Inc. and changed its name to Kemper Corporation in August 2011. Kemper Corporation was incorporated in 1990 and is headquartered in Chicago, Illinois.
This table presents a look at the data behind these stocks. The iShares Russell 2000 Small Cap ETF (IWM) is used for comparison and benchmarking purposes.
| RBC | ASPN | EVA | KMPR | IWM | ||||
| Market Index Being Tracked | RBC Bearings | Aspen Aerogels | Enviva Inc. | Kemper Corp. | iShares Russell 2000 Index ETF | |||
| Market Cap, (Bllns.) | 6.41 | 0.44 | 1.56 | 3.36 | 2.97 (Mkt-Weighted Avg. Holding) | |||
| ValuEngine Rating | 4 | 5 | 5 | 5 | 4 | |||
| VE Forecast 3-mo. Price Return | +3.28% | +1.62% | +0.68% | +4.84% | +0.62% | |||
| VE Forecast 6-Mo. Price Return | +3.38% | +1.89% | +0.14% | +6.58% | +3.02% | |||
| VE Forecast 1-yr. Price Return | +6.84% | +16.56% | +16.24% | +14.46% | -0.28% | |||
| Last mo. Price Return | +1.61% | -34.43% | -24.80% | -9.38% | -7.85% | |||
| Last 3 mo. Price Return | -2.20% | -38.14% | -54.17% | -5.79% | -2.08% | |||
| Last 6 mo. Price Return | +1.28% | -35.33% | -35.33% | +17.68% | +0.10% | |||
| Historic 1-Yr. Price Return | +19.38% | -79.27% | -73.28% | -4.83% | -13.10% | |||
| Historic 5-Yr Ann. Price Return | +12.56% | +11.13% | +1.05% | -0.84% | +0.10% | |||
| Volatility | 39.8% | 77.7% | 38.4% | 35.4% | 24.46% | |||
| Sharpe Ratio | 0.32 | 0.14 | 0.03 | -0.02 | 0.13 | |||
| Beta | 1.42 | 2.24 | 1.00 | 0.89 | 1.17 | 22.9% | ||
| Undervaluation Percentile | 66 | 90 | 73 | 39 | 72* | 0.36 | ||
| P/B Ratio | 2.5 | 1.1 | 8.7 | 2.9 | 2.0 | |||
| P/E Ratio | 31.5 | N/A | N/A | N/A | 30.5 | |||
| PEG Ratio | 1.1 | 0.1 | 0.1 | 0.1 | N/A | |||
| P/S Ratio | 4.4 | 2.6 | 1.5 | 0.6 | 5.3 | |||
| Div. Yield | 0.0% | 0.0% | 15.4% | 2.4% | 1.6% |
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Analysis of Featured Stocks:
- RBC Bearings (RBC), the largest of the four stocks, has been the only consistently positive performer. It is considered undervalued in comparison to 2/3 of the ValuEngine Universe due to continued strong expected earnings growth even though its Price-to-Earnings and Price-to-Book ratios are slightly higher than small cap benchmark IWM. Using a baseball analogy and with a forecast of 8% growth compared with 14% -16% for the other three, RBC is more of “a doubles bet” for price appreciation while the other three are “swinging for the fences.” That said, there is no substitute for doing one’s own analysis before investing.
- Kemper Corp. (KMPR) has the best projected intermediate price appreciation. It also combines a healthy 2.4% dividend with a low Beta and has relatively low price volatility. It is not undervalued by our valuation model and has a high price-to-book ratio relative to other small cap stocks. The insurance industry is very tricky to analyze so it is especially important to take a deeper dive before contemplating investment action.
- Enviva (EVA) is a small-cap stock currently paying a 15.4% yield and with high projected earnings growth. How much longer the stock pays the dividend will probably depend upon earnings expectations as it has been hammered in the market, losing 73% over the past 12 months, sending current implied dividend yield skyrocketing. It has a low Beta for a small cap stock. Even though our valuation model finds it more undervalued than almost three-quarters of our universe and attractive on a price-to-sales and price-to-earnings-growth basis, EVA has a very high 8.7 price-to-book ratio. In contrast to RBC, investing in EVA now is a “swing for the fences home run” bet on a stock that has been beaten down.
- Aspen Aerogels (ASPN) has a statistical profile very similar to EVA with even higher implied risk and no dividend. It has the highest projected upside by our forecast model but has been even more beaten down by the market during the past year for what appears to be earnings-specific reasons. It is by far the most volatile and market-price-sensitive stock of the quartet with a Beta of 2.24 and price volatility of 77.7%.
- As a strong ETF advocate both professionally and personally, I note that IWM is also rated as a 4 (Buy) by ValuEngine’s models and most of its stocks are undervalued according to our valuation model. All four stock opportunities profiled above are part of IWM. Its upside potential is less than with individual stocks, and small cap index ETFs are generally more volatile than ETFs representing the S&P 500 Index. Nevertheless, the diversification afforded by a 2000-stock ETF reduces the risk of huge drawdowns markedly as compared with buying a handful of individual stocks.
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Size/Segment ETF Analysis and Summary:
In 2022, indexed ETFs that comprised value stocks, especially those with low volatility and an income tilt, fared better than large-cap growth ETFs. The first 15 weeks of 2023 not only reversed the direction of the market, but the hierarchy as well. QQQ, the Nasdaq-100 ETF, is off to a torrid start. Most ETFs with big positions in large-cap tech stocks are right behind it. Part of this may be that these ETFs had the most 2022 losses to recover. Some of it may be renewed confidence by growth investors created partially by the artificial-intelligence fascination spurred on by the advent of ChatGPT. No one knows how long the current trend will last, but in the past month it seems to be gaining even more momentum and exponentially increasing the gap between large-cap growth and other segments. Our models are not advocating QQQ as a timely 12-month investment, however. It gets our lowest rating 1 (Strong Sell) for price performance and two-thirds of its stocks are rated by ValuEngine as overvalued.
The ValuEngine models indicate that within the next 12-months that hierarchy will be reversed again, wiping out that gap altogether. The iShares Russell 2000 Small Cap ETF (IWM) and the iShares Russell 1000 Large/MidCap Value ETF (IWD) have many more attractive and undervalued opportunities now to go along with 4 (Buy) ratings. The iShares Russell 2000 Small Cap Value ETF (IWN), has a rating of 4 (Buy). The magnitude of differentiation among the market segment ETFs is easily the greatest during the several years that I have been with ValuEngine. Therefore, the models indicate extraordinary potential for opportunity on both ends of the market. Still, all models, even ValuEngine’s, could be too early or meet other problems as data changes. Market aphorisms such as “Don’t try to catch a falling knife” and “don’t fight the tape” exist for good reasons. Timing is everything.
_______________________________________________________________________________
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
www.ValuEngine.com
support@ValuEngine.com
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