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Forbes
5 days ago
- Business
- Forbes
How To Avoid The Worst Sector Mutual Funds In Q2 Of 2025
Question: Why are there so many mutual funds? Answer: Mutual fund management is profitable, so Wall Street creates more products to sell. The large number of mutual funds has little to do with serving your best interests as an investor. I leverage this data to identify two red flags you can use to avoid the worst mutual funds: Mutual funds should be cheap, but not all of them are. The first step is to benchmark what cheap means. To ensure you are paying at or below average fees, invest only in mutual funds with total annual costs below 1.84%, – the average total annual costs of the 622 U.S. equity Sector mutual funds my firm covers. The weighted average is lower at 1.15%, which highlights how investors tend to put their money in mutual funds with low fees. Figure 1 shows Saratoga Financial Services Portfolio (SFPAX) is the most expensive sector mutual fund and Fidelity Real Estate Index Fund (FSRNX) is the least expensive. Saratoga provides five of the most expensive mutual funds while Vanguard mutual funds are among the cheapest. Figure 1: 5 Most and Least Expensive Sector Mutual Funds Worst Sector Mutual Funds in 2Q25 New Constructs, LLC Investors need not pay high fees for quality holdings. Fidelity Advisor Energy Fund (FIKAX) is one of the best ranked sector mutual fund overall. FIKAX's neutral Portfolio Management rating and 0.71% total annual cost earns it a very attractive rating. On the other hand, Vanguard Real Estate II Index Fund (VRTPX) holds poor stocks and receives an unattractive rating, yet has low total annual costs of 0.10%. No matter how cheap a mutual fund, if it holds bad stocks, its performance will be bad. The quality of a mutual fund's holdings matters more than its price. Avoiding poor holdings is by far the hardest part of avoiding bad mutual funds, but it is also the most important because a mutual fund's performance is determined more by its holdings than its costs. Figure 2 shows the mutual funds within each sector with the worst holdings or portfolio management ratings. Figure 2: Sector Mutual Funds with the Worst Holdings Most Expensive Sector Mutual Funds in 2Q25 New Constructs, LLC Vanguard, T. Rowe Price, and Fidelity appear more often than any other providers in Figure 2, which means that they offer the most mutual funds with the worst holdings. Jacob Internet Fund (JAMFX) is the worst rated mutual fund in Figure 2 based on my predictive overall rating. BNY Mellon Natural Resources Fund (DLDYX), Vanguard Utilities Index Fund (VUIAX), LDR Real Estate Value Opportunity Fund (HLRRX), and Fidelity Select Defense and Aerospace Portfolio (FSDAX) also earn a Very Unattractive predictive overall rating, which means not only do they hold poor stocks, they charge high total annual costs. Buying a mutual fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on mutual fund holdings is necessary due diligence because a mutual fund's performance is only as good as its holdings. PERFORMANCE OF MUTUAL FUND's HOLDINGs – FEES = PERFORMANCE OF MUTUAL FUND
Forbes
14-05-2025
- Business
- Forbes
How To Find The Best Sector Mutual Funds 2Q25
With an ever-growing list of similar-sounding mutual funds to choose from, finding the best is an increasingly difficult task. How can investors change the game to shift the odds in their favor? There are at least 167 different Real Estate mutual funds and at least 648 mutual funds across eleven sectors. Do investors need 58+ choices on average per sector? How different can the mutual funds be? Those 167 Real Estate mutual funds are very different from each other. With anywhere from 24 to 158 holdings, many of these Real Estate mutual funds have drastically different portfolios with differing risk profiles and performance outlooks. The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Energy ranks first for stock selection. Utilities ranks last. I think the large number of sector mutual funds hurts investors more than it helps. Manually conducting a deep analysis for every fund is simply not a realistic option, exposing investors to insufficient analysis and missing profitable opportunities. Analyzing mutual funds, with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, there can be as many as 158 stocks or more for one mutual fund. Figure 1 shows the top rated mutual fund for each sector. Best Sector Mutual Funds 2Q25 New Constructs, LLC * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity Amongst the mutual funds in Figure 1, Vanguard Financials Index Fund (VFAIX) ranks first overall, Fidelity Advisor Energy Fund (FIKAX) ranks second, and Schwab Health Care Fund (SWHFX) ranks third. Fidelity Telecom & Utilities Fund (FIUIX) ranks last. Why do you need to know the holdings of mutual funds before you buy? You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund's performance will be bad. PERFORMANCE OF FUND'S HOLDINGS – FEES = PERFORMANCE OF FUND Vanguard Financials Index Fund (VFAIX) is not only the top-rated Financials mutual fund, but is also one of the top-ranked sector mutual funds out of the 648 sector mutual funds that my firm covers. The worst mutual fund in Figure 1 is Fidelity Telecom & Utilities Fund (FIUIX), which gets an Unattractive rating. One would think mutual fund providers could do better for this sector.
Forbes
09-05-2025
- Business
- Forbes
How To Find The Best Sector ETFs 2Q25
With an ever-growing list of similar-sounding ETFs to choose from, finding the best is an increasingly difficult task. How can investors change the game to shift the odds in their favor? There are at least 108 different Technology ETFs and at least 346 ETFs across eleven sectors. Do investors need 31+ choices on average per sector? How different can the ETFs be? Those 108 Technology ETFs are very different from each other. With anywhere from 2 to 442 holdings, many of these Technology ETFs have drastically different portfolios with differing risk profiles and performance outlooks. The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Energy ranks first for stock selection. Utilities ranks last. I think the large number of sector ETFs hurts investors more than it helps. Manually conducting a deep analysis for every ETF is simply not a realistic option, exposing investors to insufficient analysis and missing profitable opportunities. Analyzing ETFs, with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, there can be as many as 442 stocks or more for one ETF. Figure 1 shows the top-rated ETF for each sector. Figure 1: The Best ETF in Each Sector Best Sector ETFs 2Q25 New Constructs, LLC * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity Amongst the ETFs in Figure 1, Invesco KBW Property & Casualty Insurance ETF (KBWP) ranks first overall, ALPS ETF Alerian MLP ETF (AMLP) ranks second, and iShares U.S. Home Construction ETF (ITB) ranks third. First Trust Utilities AlphaDEX Fund (FXU) ranks last. Why do you need to know the holdings of ETFs before you buy? You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF's performance will be bad. PERFORMANCE OF FUND'S HOLDINGS – FEES = PERFORMANCE OF FUND Invesco KBW Property & Casualty Insurance ETF (KBWP) is not only the top-rated Financials ETF but is also the overall top-ranked sector ETF out of the 346 sector ETFs that my firm covers. The worst ETF in Figure 1 is First Trust Utilities AlphaDEX Fund (FXU), which gets an Unattractive rating. One would think ETF providers could do better for this sector.
Forbes
14-04-2025
- Business
- Forbes
No Better Time to Beware These Zombie Stocks
As market volatility reigns, there's no better time than now to share the Zombie Stocks. I've decided to release this model portfolio to the public to help more investors. Successful investing is as much about avoiding zombie stocks as it is finding good stocks. Just one blowup could upend years of winners. I launched this list of Zombie Stocks in June 2022. Of the 33 stocks added to the list, only 12 remain. These stocks could legitimately go to $0/share because they have flawed business models that will likely never generate enough cash pay equity investors a penny. The damage these stocks could do to your portfolio is not hypothetical. Since the first Zombie Stocks report on June 23, 2022, the Zombie Stocks short model portfolio (up 3%) has outperformed the shorting the S&P 500 (down 29%) by 32%. See Figure 1. Figure 1: Performance of Zombie Stocks List Through 4/7/25 Zombie Stock List Performance 4-7-25 New Constructs, LLC The most recent update to the Zombie Stock list was the removal of Trupanion (TRUP) due to it extending its cash runway beyond 24 months. When I first named Trupanion a Zombie Stock it had enough cash to sustain its cash burn for another 23 months. Trupanion slowed its FCF burn from -$109 million in 2023 to -$46 million in 2024. The lower, yet still negative, FCF means Trupanion no longer qualifies as a Zombie Stock because it has enough cash to sustain its 2024 FCF burn for 78 months from the end of March 2025. Trupanion remains in the Danger Zone, and its stock is still very dangerous. Below I show why TRUP remains a very risky investment, and then I present the full Zombie Stock list in Figure 5 and 6. Figure 5 includes which stocks remain on the list. I'm always looking for more Zombie Stocks to add to the list. If one only listened to Trupanion, you would get a misleading view of the company's profitability. From 2019 to 2024, Trupanion's Adjusted EBITDA improved from $11 million to $46 million, while its GAAP net income fell from -$2 million to -$10 million. Over the same time, the company's economic earnings, the true cash flows of the business, fell from -$21 million to -$77 million. It is a big red flag when the company's preferred non-GAAP metric is rising while its economic earnings are declining, or even worse, when its GAAP net income is declining as well. The discrepancy between the metrics should come as no surprise since Trupanion openly admits in earnings releases that its non-GAAP metrics may 'exclude expenses that may have a material impact on Trupanion's reported financial results.' Figure 2: Trupanion's GAAP Net Income vs. Economic Earnings vs. Adjusted EBITDA: 2019 – 2024 TRUP Economic Earnings vs Net Income vs EBITDA New Constructs, LLC Despite positive and increasing Adjusted EBITDA, Trupanion hasn't achieved a positive free cash flow (FCF) in any full year since 2015 (earliest data available). In fact, the company has only achieved a positive FCF in one quarter (3Q18) out of thirty-six in my model. Trupanion has burned $508 million (34% of enterprise value) in free cash flow (FCF) excluding acquisitions since 2015. See Figure 3. Figure 3: Trupanion's Cumulative Free Cash Flow Since 2015 TRUP Free Cash Blow Burn - 2015-2024 New Constructs, LLC Below, I use my reverse discounted cash flow (DCF) model to analyze the future cash flow expectations baked into Trupanion's stock price. Trupanion's stock is priced as if the business will instantly reach profitability, continue to grow revenue, and nearly double its market share, a feat that is highly unlikely. I also present an additional DCF scenario to highlight the downside risk in the stock if Trupanion fails to achieve these overly optimistic expectations. To justify its current price of $35/share, my model shows Trupanion would have to: In this scenario, Trupanion would generate $8.0 billion in revenue in 2032, which is more than 6x the company's 2024 revenue, and grow its market share in the global pet insurance industry from an estimated 12% in 2024 to 21% in 2032. This scenario also implies Trupanion's NOPAT would reach $272 million in 2032 compared to -$19 million in 2024. Furthermore, companies that grow revenue by 20%+ compounded annually for such a long period are 'unbelievably rare', making the expectations in Trupanion's share price even more unrealistic. If I instead assume Trupanion: the stock would be worth $18/share today – a 49% downside to the current price. This scenario still implies Trupanion's revenue would reach $4.5 billion in 2032, which is 3.5x higher than the company's 2024 revenue. In this scenario, Trupanion's NOPAT would reach $144 million in 2032, which is well above the company's best ever NOPAT of -$2 million in 2018. Should the company fail to improve margins and grow revenue at a rapid pace, the stock could be worth $0. Figure 4 compares Trupanion's implied future NOPAT in these scenarios to its historical NOPAT. Figure 4: Trupanion's Historical and Implied NOPAT: DCF Valuation Scenarios TRUP DCF Implied NOPAT New Constructs, LLC Each of the above scenarios assumes Trupanion grows revenue, NOPAT and FCF without increasing working capital or fixed assets. This assumption is highly unlikely but allows me to create best-case scenarios that highlight the unrealistically high expectations embedded in the current valuation. For reference, Trupanion's invested capital grew 20% compounded annually in the last decade. If I assume Trupanion's invested capital increases at a similar rate in the DCF scenarios above, the downside risk is even larger. Given that the performance required to justify its current price is overly optimistic, I dig deeper to see if Trupanion is worth buying at any price. The answer is no. The company has $129 million in total debt, $2 million in deferred tax liabilities, $6 million in employee stock options, and no excess cash. Trupanion has an economic book value, or no-growth value, of -$7/share. In other words, I do not think equity investors will ever see $1 of economic earnings under normal operations, which means the stock would be worth $0 today. Though TRUP is no longer a Zombie Stock, it remains very dangerous. When I select companies to add to the Zombie Stock list, I look for companies that have: While being on the Zombie Stocks list, companies may no longer meet these criteria. I review such instances to decide if I believe the company has truly improved its business, or if the results look more like a blip while the issues with the business model remain in place. For the companies I believe have improved their standing, I remove them from the Zombie Stock list. In fact, I've removed companies from the list because: See Figure 5 for all stocks currently on the Zombie Stocks List. Figure 5: Current Zombie Stocks List – 4/7/25 New Constructs' Zombie Stock List New Constructs, LLC Of course, the risk of running out of cash within 24 months makes a stock risky. But what makes Zombie Stocks particularly dangerous? Low and negative economic book values. For the few companies that currently generate positive earnings or net operating profit after-tax (NOPAT), they have liabilities that more than offset the positive earnings. In other words I do not think equity investors will ever see $1 of economic earnings under normal operations, which means the stock would be worth $0 today. Making matters worse, the disconnect between market cap and economic book value increases risk. These stocks trade so far beyond the no growth value of the business that should the stock price correct, as we're seeing in the current market, it could create a contagion where confidence in the business follows suit and pushes the company towards bankruptcy even quicker. Figure 6 shows all 33 Zombie Stocks. I mark those that have been removed from the list with an asterisk. Figure 6: Zombie Stock Reports: With Performance Since Publish Date Through 4/7/25 *Stocks removed from the Zombie Stock List. Performance tracked through the date each was removed. Linked report goes to the report in which the stock was removed. Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
Forbes
21-03-2025
- Business
- Forbes
Shell's Cash Flow Increases The Safety Of Its Dividend Yield
stack of silver coins with trading chart in financial concepts and financial investment business ... [+] stock growth Tariffs have been a hot topic since President Trump started his second term, and many investors are worried about the long-term consequences. On the surface it's a simple idea, if we tax foreign imports, we will strengthen our own industries by creating more jobs and generating more cash. But, it doesn't always work so simply. When president Trump instituted tariffs on foreign steel in order to protect U.S. blue collar jobs in 2018, researchers estimate U.S steel producers added about 1,000 new jobs. However, the knock-on effects, namely input costs for U.S. industries that use steel, resulted in an estimated 75,000 fewer manufacturing jobs. The ongoing tariffs, and the uncertainty surrounding additional tariffs, will continue to stoke market volatility. Finding strong businesses with cheap valuations is hard enough, and new trade policies and tariffs only make that job more difficult. That's where New Constructs steps in. Even in volatile markets, my team scours the entire market to find the best investment opportunities. Diligence matters, now more than ever, especially in a new Golden Era of Investing. Today's free stock pick provides a summary of how I pick stocks for the Safest Dividend Yields Model Portfolio. This Model Portfolio only includes stocks that earn an attractive or very attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flow (FCF) provide higher quality and safer dividend yields because strong FCF is proof they have the cash to support the dividend. I think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform. Shell, PLC (SHEL) is the featured stock in our Safest Dividend Yields Model Portfolio. Shell has grown revenue and net operating profit after tax (NOPAT) by 1% and 14% compounded annually, respectively, since 2015. The company's NOPAT margin improved from 3% in 2015 to 9% in the TTM, while invested capital turns remained the same at 0.8 over the same time. Rising NOPAT margins drive the company's return on invested capital (ROIC) from 3% in 2015 to 8% in the TTM. Figure 1: Shell's Revenue & NOPAT Since 2015 SHEL Revenue & NOPAT 2015-TTM Shell has increased its regular dividend from $0.32/share in 2Q20 to $0.72/share in 1Q25. The current quarterly dividend, when annualized provides a 4.2% dividend yield. The company's free cash flow (FCF) easily exceeds its regular dividend payments. From 2020 through 3Q24, the company generated $145.7 billion (53% of current enterprise value) in FCF while paying $36 billion in regular dividends. See Figure 2. Figure 2: Shell's FCF Vs. Regular Dividends Since 2020 SHEL Free Cash Flow & Dividends As Figure 2 shows, this company's dividends are backed by a history of reliable cash flows. Dividends from companies with low or negative FCF are less dependable since the company would not be able to sustain paying dividends. At its current price of $67/share, this stock has a price-to-economic book value (PEBV) ratio of 0.5. This ratio means the market expects the company's NOPAT to permanently fall 50% from TTM levels. This expectation seems overly pessimistic given that the company has grown NOPAT 14% compounded annually over the last eight years and 3% compounded annually over the past decade. Even if the company's: the stock would be worth $91/share today – a 36% upside. In this scenario, the company's NOPAT would actually fall 3% compounded annually through 2033. Should the company's NOPAT grow more in line with historical growth rates, the stock has even more upside. Below are specifics on the adjustments I make based on Robo-Analyst findings in this featured stock's 20-F and 6-Ks: Income Statement: I made nearly $22 billion in adjustments with a net effect of removing just under $9 billion in non-operating expenses. Balance Sheet: I made around $127 billion in adjustments to calculate invested capital with a net increase of over $56 billion. The most notable adjustment was for asset write downs. Valuation: I made over $118 billion in adjustments to shareholder value, with a net decrease of around $52 billion. Other than total debt, the most notable adjustment to shareholder value was for excess cash. Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
