{"id":3004,"date":"2023-01-04T02:00:11","date_gmt":"2023-01-04T02:00:11","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=3004"},"modified":"2023-01-04T02:00:52","modified_gmt":"2023-01-04T02:00:52","slug":"is-it-time-to-get-back-to-basics","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/is-it-time-to-get-back-to-basics\/","title":{"rendered":"Is It Time to Get Back to Basics?"},"content":{"rendered":"

I feel deluged lately by webinars and events touting investments in gold and precious metals. One theory pushed to support investment in these industry groups is that 1974 is here again.\u00a0 They claim it is inevitable that the market will tank further as the economy plunges into stagflation, a deeper recession accompanied by huge inflation and problematic unemployment.\u00a0\u00a0<\/span><\/p>\n

At the same time infrastructure building is still a government priority and unspent dollars have already been allocated for this process in the Build Back Better bill. Therefore, it is time to invest in industrial metals and other cyclical basic materials groups. Interestingly, all of these groups are generally covered by the same ETFs in a sector called either materials or basic materials depending upon which sector classification system is being used.\u00a0 This week we analyze the top three ETFs that cover the entire sector, not just a portion of it.\u00a0 Then we look inside the sector and highlight four of its most interesting stocks according to our models.<\/span><\/p>\n

All 5,000 stocks, 16 sector groups, 140 industries, and 500 ETFs have been updated.<\/b><\/h5>\n
Two week free trial: <\/b>www.ValuEngine.com<\/b><\/a>\u00a0\u00a0<\/b><\/h5>\n

The ETFs selected are:<\/span>
\n<\/span>
\n<\/span>XLB, Materials Select Sector SPDR ETF – <\/b>tracks a market-cap-weighted index of US basic materials companies that includes only the materials components of the S&P 500. It is dominated by giant chemical companies including 6 of its top 10. 3 of the remaining 4 are metals companies including mining giants Newmont Corp. and Freeport McMoRan. The remaining company, Corteva (<\/span>CTVA<\/b>), provides agricultural products and is the only one in the top 10 rated <\/span>4 <\/b>(Buy) by ValuEngine.\u00a0 It will be included in the stock analysis portion of this article.<\/span><\/p>\n

FXM<\/b>, <\/span>First Trust Materials ALPHADEX ETF<\/b> – tracks a tiered, equal-weighted index of large- and mid-cap basic materials firms in the US. Holdings are selected and weighted based on growth and value metrics.\u00a0 <\/span>FXZ<\/b> utilizes a quant-driven strategy to pick the ‘best’ basic materials firms in the US, using growth and value screeners. This minimalist approach, combined with a tiered equal-weighting scheme, leads to a concentrated portfolio that tilts away from large-caps and leans toward mid-caps. The result is major sector tilts, with elevated risk at times. Overall, FXZ offers a \u201csmart beta\u201d approach to the US basic materials space, instead of providing market-like sector exposure. The value tile is very evident by the fact that 8 of its top ten holdings are industrial metals companies.<\/span><\/p>\n

PSCM<\/b>, <\/span>Invesco S&P Small Cap Materials ETF<\/b> – tracks an index of US small-cap basic materials firms weighted by market cap.\u00a0 PCSM focuses exclusively on US small-cap basic materials companies. The fund pulls from the S&P SmallCap 600, a market-cap-weighted index that consists of US small-cap companies screened for size, liquidity, and financial viability. It specifically holds a concentrated portfolio of companies engaged in producing raw materials, including paper or wood products, mining and metals, chemicals, and construction materials.\u00a0 The top ten holdings are dominated by specialty chemical companies with a sprinkling of metal companies.\u00a0 Its top holding, Livent Corporation (<\/span>LTHM<\/b>) is also ValuEngine\u2019s top-rated company in the sector (<\/span>5<\/b>=Strong Buy) with primary listing in the US and a market cap above $1 billion.\u00a0\u00a0<\/span><\/p>\n

As usual, the S & P 500 benchmark ETF is included for comparison.\u00a0 Not so usual, given that <\/span>PSCM <\/b>selects its stocks from a small cap index, <\/span>IWM<\/b> (the iShares Russell 2000 ETF) representing the small cap universe is also included.\u00a0 All Data is as of Dec. 12, 2022.<\/span><\/p>\n

Current ValuEngine reports on these stocks or ETFS can be viewed <\/b>HERE<\/b><\/a><\/h5>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
<\/td>\nXLB<\/b><\/td>\nFXZ<\/b><\/td>\nPSCM<\/b><\/td>\nIWM<\/b><\/td>\nVOO<\/b><\/td>\n<\/tr>\n
ETF Names<\/b><\/td>\nMaterials Select Sector SPDR<\/b><\/td>\nFirst Trust Materials AlphaDEX\u00a0<\/b><\/td>\nInvesco S&P SmallCap Materials\u00a0<\/b><\/td>\niShares Russell 2000\u00a0<\/b><\/td>\nVanguard S&P 500\u00a0<\/b><\/td>\n<\/tr>\n
Weighted Avg Market Cap ($B)<\/b><\/td>\n53.7<\/span><\/td>\n16.6<\/span><\/td>\n2.7<\/span><\/td>\n2.9<\/span><\/td>\n471.5<\/b><\/td>\n<\/tr>\n
VE Rating<\/b><\/td>\n2<\/b><\/td>\n1<\/b><\/td>\n5<\/b><\/td>\n4<\/b><\/td>\n3<\/b><\/td>\n<\/tr>\n
VE Forecast 1 mo Rtn<\/b><\/td>\n-0.22%<\/span><\/td>\n-0.42%<\/span><\/td>\n+0.08%<\/b><\/td>\n-0.02%<\/span><\/td>\n-0.17<\/span><\/td>\n<\/tr>\n
VE Forecast 3 mo Rtn<\/b><\/td>\n+2.28%<\/b><\/td>\n+0.78%<\/span><\/td>\n+1.49%<\/span><\/td>\n+1.09%<\/span><\/td>\n+1.96%<\/span><\/td>\n<\/tr>\n
VE Forecast 6 Mo Rtn<\/b><\/td>\n+5.95%<\/b><\/td>\n+3.64%<\/span><\/td>\n+2.59%<\/span><\/td>\n+2.55%<\/span><\/td>\n+5.25%<\/span><\/td>\n<\/tr>\n
VE Forecast 1 yr Rtn<\/b><\/td>\n-2.68%<\/span><\/td>\n-5.10%<\/span><\/td>\n+0.92%<\/b><\/td>\n-0.17%<\/span><\/td>\n-2.00%<\/span><\/td>\n<\/tr>\n
Last mo. Return<\/span><\/td>\n+6.45%<\/span><\/td>\n+7.74%<\/b><\/td>\n+1.73%<\/span><\/td>\n+2.28%<\/span><\/td>\n+5.13%<\/span><\/td>\n<\/tr>\n
Last 3 mo. Return<\/span><\/td>\n+3.73%<\/b><\/td>\n-0.18%<\/span><\/td>\n+1.38%<\/span><\/td>\n-4.69%<\/span><\/td>\n-3.27%<\/span><\/td>\n<\/tr>\n
Last 6 mo. Return<\/span><\/td>\n-3.88%<\/span><\/td>\n-11.56%<\/span><\/td>\n-2.53%<\/span><\/td>\n-2.70%<\/span><\/td>\n-2.05%<\/b><\/td>\n<\/tr>\n
Historic 1 Yr Rtn\u00a0<\/span><\/td>\n-7.73%<\/span><\/td>\n+4.66%<\/b><\/td>\n-2.85%<\/span><\/td>\n-19.00%<\/span><\/td>\n-15.68%<\/span><\/td>\n<\/tr>\n
Historic 5 Yr Ann. Rtn<\/span><\/td>\n+6.58%<\/span><\/td>\n+8.46%<\/span><\/td>\n+5.33%<\/span><\/td>\n+3.97%<\/span><\/td>\n+8.62%<\/b><\/td>\n<\/tr>\n
Volatility<\/span><\/td>\n21.8%<\/span><\/td>\n27.8%<\/span><\/td>\n29.1%<\/span><\/td>\n23.8%<\/span><\/td>\n18.7%<\/b><\/td>\n<\/tr>\n
Sharpe Ratio\u00a0<\/span><\/td>\n0.30<\/span><\/td>\n0.30<\/span><\/td>\n0.18<\/span><\/td>\n0.17<\/span><\/td>\n0.46<\/b><\/td>\n<\/tr>\n
Beta<\/span><\/td>\n1.07<\/span><\/td>\n1.27<\/span><\/td>\n1.30<\/span><\/td>\n1.16<\/span><\/td>\n1.00<\/b><\/td>\n<\/tr>\n
# of Stocks<\/span><\/td>\n29<\/span><\/td>\n38<\/span><\/td>\n32<\/span><\/td>\n1957<\/span><\/td>\n500<\/span><\/td>\n<\/tr>\n
Percent of stocks Undervalued by VE<\/span><\/td>\n25%<\/span><\/td>\n32%<\/span><\/td>\n57%<\/span><\/td>\n71%<\/b><\/td>\n37%<\/span><\/td>\n<\/tr>\n
P\/B Ratio<\/span><\/td>\n2.7<\/span><\/td>\n1.8<\/b><\/td>\n2.0<\/span><\/td>\n2.0<\/span><\/td>\n3.5<\/span><\/td>\n<\/tr>\n
P\/E Ratio<\/span><\/td>\n13.4<\/span><\/td>\n11.7<\/b><\/td>\n11.8<\/span><\/td>\n28.3<\/span><\/td>\n17.2<\/span><\/td>\n<\/tr>\n
P\/S Ratio<\/span><\/td>\n4.9<\/span><\/td>\n1.0<\/span><\/td>\n0.7<\/b><\/td>\n5.7<\/span><\/td>\n2.3<\/span><\/td>\n<\/tr>\n
Div. Yield<\/span><\/td>\n2.1%<\/b><\/td>\n1.5%<\/span><\/td>\n0.8%<\/span><\/td>\n1.3%<\/span><\/td>\n1.7%<\/span><\/td>\n<\/tr>\n
Largest Holding\u00a0<\/span><\/td>\nLinde PLC\u00a0<\/span><\/p>\n

LIN<\/b> 18.4%<\/span><\/p>\n

VE 3<\/b><\/td>\n

Steel Dynamics<\/span><\/p>\n

STLD<\/b>\u00a0<\/span><\/p>\n

6.0%\u00a0<\/span><\/p>\n

VE 2<\/b><\/td>\n

Livent Corp.<\/span><\/p>\n

LTHM\u00a0<\/b><\/p>\n

8.3%\u00a0<\/span><\/p>\n

VE 5<\/b><\/td>\n

Shockwave Medical\u00a0<\/span><\/p>\n

SWAV\u00a0<\/b><\/p>\n

0.4%\u00a0<\/span><\/p>\n

VE 4<\/b><\/td>\n

Apple Corp.<\/span><\/p>\n

AAPL<\/b><\/p>\n

7.1%\u00a0<\/span><\/p>\n

VE 3<\/b><\/td>\n<\/tr>\n

Expense Ratio<\/span><\/td>\n0.19%<\/span><\/td>\n0.61%<\/span><\/td>\n0.29%<\/span><\/td>\n0.19%<\/span><\/td>\n0.03%<\/b><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

* ETF Undervaluation # is the percentage of undervalued stocks, not a comparison with all other ETFs in our universe<\/span><\/i><\/p>\n

Current ValuEngine reports on these stocks or ETFS can be viewed <\/b>HERE<\/b><\/a><\/h5>\n

ANALYSIS<\/b><\/p>\n

    \n
  1. All Materials ETFs are clearly not the same.\u00a0 Of the three compared here, the historical performance numbers, forecasts and supporting data are variegated in almost every category.\u00a0 On a forecasted basis, both extremes are covered.\u00a0 <\/span>PSCM<\/b>, <\/span>Invesco S&P Small Cap Materials ETF <\/b>gets our highest rating of <\/span>5 <\/b>(Strong Buy) while <\/span>FXZ<\/b>, <\/span>First Trust Materials AlphaDEX ETF <\/b>is rated <\/span>1 <\/b>(Strong Sell).\u00a0 Looking inside the two ETFs, our valuation model agrees with our forecasting model.\u00a0 57% of <\/span>PSCM<\/b>\u2019s holdings are considered overvalued as compared with 32% for <\/span>FXZ.\u00a0\u00a0<\/b><\/li>\n
  2. The largest basic materials sector ETF, <\/span>XLB<\/b> (Select Sector SPDRs Materials), also has by far the largest average market cap among its holdings. This is $54 Billion as compared with $17 Billion and $3 Billion.\u00a0 Rated <\/span>2 <\/b>(Sell)<\/span> by the forecast model, our valuation model also is skeptical about this ETF, rating 75% of its holdings as overvalued. Moreover, <\/span>XLB <\/b>is so concentrated that its top 5 holdings comprise about 45% of its weight.\u00a0\u00a0<\/span><\/li>\n
  3. Although our models rate <\/span>FXZ<\/b> as a sell now, it had by far the best performance among the five ETFs for the past 12 months.\u00a0 It increased by 4.7% while the VOO was down close to 16%.\u00a0 It also had the best one-month performance in this research study.<\/span><\/li>\n
  4. Perhaps one reason <\/span>PSCM<\/b> is rated a Strong Buy is that <\/span>IWM<\/b>, the Russell 2000 Small Cap ETF Benchmark is now rated <\/span>4 <\/b>(Buy) despite having greatly underperformed S&P 500-benchmarked <\/span>VOO <\/b>during the prior five years.\u00a0 Our valuation model favors the stocks in <\/span>IWM <\/b>as a group over those in <\/span>VOO<\/b> as 71% are undervalued as compared with 37%.<\/span><\/li>\n<\/ol>\n

    Looking inside the Basic Materials sector at individual stocks, there are five stocks that I considered germane enough for a quick analytic review:<\/span><\/p>\n