Home Factor company TMFC: Decline as expected, factors point to whether it may recover soon (TMFC)

TMFC: Decline as expected, factors point to whether it may recover soon (TMFC)

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This is my third article on the Motley Fool 100 Index ETF (BATS: TMFC), a passively managed exchange-traded fund that invests in a cohort of approximately 100 mega/large-cap U.S. stocks, which analysts at The Motley Fool consider are poised to outperform the market over time. They are flagship companies with resilient margins and solid growth prospects. In all honesty, they should boast a higher valuation in most cases. But is it an adequate proposal in the midst of the times? This year has been painful for this strategy.

I’ve never been particularly excited about the fund’s prospects in a higher interest rate environment. In the first note published in January, I acknowledged that the ETF’s relatively short history was nothing short of successful, with alpha delivered in 2019 and 2020, although total return in 2021 was slightly lower compared to the iShares Core S&P 500 (IVV) ETF.

However, the market regime had changed. It’s hard not to notice when the bear market is raging. The unstoppable FAANGM and broad rally in the tech sector (acronyms vary) was no longer the case already in January. And TMFC’s stock allocation geared toward a high multiple growth ladder was the wrong place, as growth premium repricing was about to pick up steam. And even though TMFC has been declining almost incessantly this year, I don’t yet know if the infliction point is near and if the bulls are about to regain control.

Indicators fall as growth premiums shrink

2022 for TMFC has been nothing short of calamitous, with only March being more or less successful, with a positive total return of around 5%. April was totally disastrous; it emerged its worst month since its inception in January 2018. The depth of the decline eclipses both December 2018 and March 2020. What is more discouraging is that in both cases it staged a recovery, rebounding particularly strongly in April 2020 as the market was enthusiastically rallying after the first weeks of pandemic chaos. This year, it continued to decline in May and June. The first half of July also offered no relief.

TMFC Returns

Created by author using data from Portfolio Visualizer

Since my April article, TMFC’s price has fallen about 12.5%, underperforming the S&P 500, partly proving my point that the exorbitant valuation of most of its holdings is a drag on its performance, regardless of the strength of its exposure to profitability. factor.

Today I would like to provide an in-depth review of the new version of the TMFC wallet, addressing the additions/removals made during the quarterly replenishment, and harnessing the power of Quant data to answer the question of whether factors have become more upside.

Some minor portfolio adjustments, equally inflated valuations

In the wake of the most recent quarterly reconstruction of TMFC’s underlying index, six stocks were dropped while five were added; both groups have weights of only a few percentage points. In other words, the portfolio has remained relatively homogeneous since its main positions have not been modified. So, at least judging by the fund’s investment decisions this year, it’s keeping its equity mix more or less stable, as the large-cap cohort of the TMF recommendation universe is not subject to scrutiny. a major overhaul.

As illustrated by the dataset on its website, TMFC now has no exposure to the following companies that were present in the late April version of its portfolio:

Arista Networks (ANET) 0.18%
Cloud Flare (NET) 0.16%
The Trade Desk (TTD) 0.14%
OKTA (OKTA) 0.11%
Unity Software (U) 0.11%
Embecta (EMBC) 0.01%

As I mentioned in the previous article, EMBC is a small-cap company spun off from Becton, Dickinson and Company (BDX), a manufacturer of healthcare equipment, in April. It didn’t seem to fit TMFC’s large cap, high conviction strategy, so it was removed on the rebuild as I expected.

The other five stocks likely had their bullish TMF ratings removed and were therefore squeezed out of the TMFC portfolio. It should be noted that their performance this year has been nothing short of dismal, with U’s catastrophic decline recently exacerbated by the announcement of the acquisition and reduced growth prospects for the year being the most profound of the group.

Chart

The five additions are shown below:

Texas Instruments (TXN) 0.79%
S&P Global (SPGI) 0.64%
Lowe’s Companies (LOW) 0.64%
Copart (CPRT) 0.14%
CoStar Group (CSGP) 0.12%

Interestingly, CPRT could be found in the January release of the portfolio, then the fund exited its position, and now it appears to have appeared again in the TMF recommendation universe and qualified as the TMFC portfolio. The same is true in the case of the CSGP.

As expected, not much has changed in terms of sector exposure. It appears that TMFC is still staunchly bullish on the technology, with nearly 42% allocated to it as of July 14. Its tilt seems somewhat permanent, due to the market cap weighting, so I don’t expect it to change in the future. The consumer discretionary sector comes in second place, with a weight close to 16%. Of course, he owns Tesla (TSLA) and Amazon (AMZN); other stocks in the CS sector have only about 5.2% weight. There are traces of energy and material stocks, with a total weight of less than 1%.

The minor adjustments to the portfolio discussed above raise the question of whether TMFC’s exposure to return factors has changed, for better or for worse. Well, it’s worth guessing that the sharp decline in the price might lead to a major valuation improvement first.

However, the harsh reality is that even after a stormy first half of 2022, the multiples of its holdings have only compressed slightly. We only see six value players (a B- or better rating) in the fund, with a combined weighting of 2.2%; almost nothing has changed since April, when that figure was around 2.4%.

TMFC Value Stocks

Created by the author using data from the fund and Seeking Alpha

Below are selected evaluation metrics for the group:

Select value metrics for stocks

Data as of July 14 (Created by the author using data from the fund and Seeking Alpha)

About 80.3% have a perfect price, with a D+ Quant Valuation or worse. It’s better compared to January (~89%) but in line with April (~81%). And the cohort of the top 20 is still replete with stocks priced above their sectors, in part justified by stellar quality, but in many cases not backed by industry-leading growth rates.

TMFC Top 20 Holdings

Created by the author using data from the fund and Seeking Alpha

I also believe it is worth discussing the growth profiles again. In the April note, I said I spotted a downward trend in TMFC’s holdings growth rates. This time, I must admit that the trend remains intact.

The weight of stocks with an expected earnings growth rate of at least 20% fell from around 28% to around 24%. The share of those with a forward EPS growth rate above 20% fell from around 54% to around 52.4%. The EBITDA outlook has also become much bleaker: those with growth rates of 20% and better are just 48.8% compared to nearly 60% in April.

Conclusion

Growth-oriented strategies have been hit hard this year, with TMFC being no exception. Initially, it was about the exodus of investors from high-multiple stocks as a preemptive step to prepare for the end of the era of ultra-loose monetary policy. Then it was geopolitics that wreaked havoc on commodity markets, accelerated inflation and spurred the reduction of growth premiums in anticipation of significantly higher interest rates. Lately, recession fears have added to this mix. Unfortunately, in this environment, I see no material reason to upgrade TMFC to a purchase.