PRN: A Great Play On The Best (Secular Growth) Part Of The Industrial Sector

seekingalpha05-14

yoh4nnThe Industrial sector isn’t what it used to be. Neither is investing in Industrials. Traditionally, it’s been about smokestacks, etc. For investors, this has been a very cyclical play. The main ...

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Neither is investing in Industrials. Traditionally, it’s been about smokestacks, etc. For investors, this has been a very cyclical play. The main ...</p>\n\n<a href=\"https://seekingalpha.com/article/4692821-prn-a-great-play-on-the-best-secular-growth-part-of-the-industrial-sector\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU1093756325.SGD","symbol_name":"FTIF - Franklin K2 Alt Strat Fd A (acc) SGD-H1","start_time":0,"source_url":"https://seekingalpha.com/article/4692821-prn-a-great-play-on-the-best-secular-growth-part-of-the-industrial-sector","article_id":"2435068893","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/584585618/image_584585618.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2435068893","pubTimestamp":1715622936,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"The first revolution began around 1800 more or less. It’s replaced human and animal effort with machines powered by steam or water. 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Neither is investing in Industrials. Traditionally, it’s been about smokestacks, etc. For investors, this has been a very cyclical play. The main investment case for or against Industrials was, in essence, an economic forecast. If you are bullish on GDP, Industrial Production, etc., you want to own Industrials. If not, you didn’t. It was that simple. Today, I won’t go so far as to deny cyclicality. But there’s a heck of a lot more to modern Industrials. The sector has a strong secular component (i.e., growth prospects that don’t depend on economic strength). In fact, secular improvement has always been part of the scene, even if not always appreciated. Consider Reverend Thomas Robert Malthus and his infamous 1798 work, “An Essay on the Principle of Population.” He said the population increases “geometrically” (doubling every 25 years). But food supply increases arithmetically (much more slowly). So by now, 226 years beyond the first edition of that essay, we should all be starving. Or at least we should be well on our way there. Fortunately, for us. Malthus was wrong. We’re not starving. Thank Industry for that. Now, I’m not wearing blinders. I know that many parts of the world, and even parts of the U.S. remain very poor. But even this doesn’t mean Malthus was right. Perspective matters. Starting more than 300,000 years ago to about 10,000 BC, when we (homo sapiens) emerged, little changed. Most humans had subsistence lives based on hunting and gathering. Thanks to agriculture, living standards rose a bit afterward. But starting around 1750-1800, things started to take off. Sustained economic growth and improved quality of life became normal. Extreme poverty persists. But it’s been shrinking rapidly. The World Bank defines extreme poverty in terms of an international dollar, the purchasing power of which matches the 2011 U.S. Dollar. (It’s corrected based on different price levels across time and from country to country.) In 1820, 89% of the world’s population lived in extreme poverty. By 2015, that was so for only 10% of the population. Malthus erred because he assumed one person’s gain had to be somebody else’s loss. That may have been so for most of human history. But as we moved through the 18th century, technological innovation and productivity became important factors. This was the Industrial Revolution. Actually, there have been multiple industrial revolutions. Different sources detail them in different ways. But here’s a representative breakdown… The first revolution began around 1800 more or less. It’s replaced human and animal effort with machines powered by steam or water. The second revolution, featuring electric power, started around 1870. From the 1970s through the present, we’ve been in the digital age. Computers now do things humans used to do. Today, we’re building the post-digital era. Traditionally, humans managed the computers. Now, computers are running other computers. This involves Internet of Things (IoT), Big Data, Machine Learning (ML), Artificial Intelligence (AI), etc. Business cycles influenced various ups and downs. But as we became more advanced, a lot of what we accomplished transcended GDP trends. It took a lot of secular growth, co-existing with cyclical growth, to get us to where we are today. Many who consider the ongoing digital and emerging post-digital eras focus on tech stocks. That’s fine. Big Tech makes a lot happen. That’s why those companies grow as they do. And it’s why those stocks are valued as richly as they are. But Tech needs help from another sector, the one about which we’re concerned today… the Industrial sector. However digital we think we are, we still need physical settings. We need facilities in which we manufacture digital “stuff.” And we need a world in which we can do all we need to do. We need modern factories. We need better infrastructures. We need efficient supply chains. And having been scarred by the impact of early industrial waves on our physical world, we need more environmentally constructive ways of doing things. A century ago, blast furnaces and smokestacks were in. Today, it’s about “clean rooms” and the like. A century ago, industry was about brute force. Today, it’s increasingly about deep logic and hyper precision. A century ago and through a good chunk of the 1900s, we built up our physical infrastructure. Much, however, has deteriorated with age and use, and needs overhaul. Helping, too, is the Biden Administration’s subsidy- and incentive-laden industrial policy. He’s been aiming to boost domestic semiconductor manufacturing, green energy production and plain-vanilla infrastructure. All of that helps secular industrial companies. Ultimately, industry is still industry. And in every industrial revolution or wave, investors who put their money into the right enablers profited handsomely. That’s my goal now. There are many exciting secular industrial stocks out there. And I’ll be following and writing about a bunch of them over time. But for today, I want to start out aiming at the one-stop diversification ETFs offer. Picking an Industrial ETF – An Early Challenge You might think it would be easy to find a good industrial ETF. The big- SPDR roster of sector ETFs has an entry here. It’s the Industrial Select Sector SPDR ETF (XLI). As per the usual practice of those ETFs, XLI is market cap weighted. I don’t usually favor cap weighting. Too much concentration in too few big names defeats the point of an ETF. Consider the Consumer Discretionary Select Sector SPDR ETF (XLP). Its top position, Amazon.com (AMZN), hogs 25% of the portfolio… The runner-up, Tesla (TSLA) is weighted 13%. Then comes Home Depot (HD) at 9%. That’s ridiculous. If I want AMZN, TSLA, and HD, I’ll just buy AMZN, TSLA, HD. I see no point in diluting that with 50 other stocks, none of which can contribute meaningfully to performance. At least XLI isn’t as whacky as that. Its top position, General Electric (GE), is only 4.7% of the portfolio. But for those who prefer equal weighting, there’s the Invesco S&P 500 Equal Weight Industrials ETF (RSPN). I started out figuring I’d pick XLI or RSPN. But on checking the names in the portfolios (both ETFs have the same stocks), I noticed something… The “GICS” company classification those funds used to decide what is or isn’t an Industrial left me cold. I wasn’t thrilled with rival classification schemes ether. I suspect few, if any, Seeking Alpha readers think much, if at all, about this. But don’t brush it off as a geek thing. For ETF investing, which is usually passive, it can be critical. GICS usually does an impressive job. And I understand why GICS put the Industrial sector label on the companies in these flagship Industrials ETFs. I’m not privy to what goes on in the belly of the GICS organization. But from looking at its roster of Industrial companies, I can make some rational guesses. It looks to me like GICS wanted companies whose fortunes moved along with the economy. That brought in a lot of manufacturers. That’s to be expected. It also pulled in companies that don’t manufacture anything, like transportation firms. According to VerttaFi, transportation is 18.93% of the XLI portfolio. It amounts to 16.99% of the equal weighted RSPN portfolio. Yes, those companies are cyclical. But they don’t match the secular-oriented theme that draws me now to Industrials. So I scratched the bellwether XLI and RSPN funds. A bunch of other ETFs referred to as Industrials have narrow focus, such as cybersecurity robotics and aerospace. I may own or cover relevant stocks or ETFs later on. But that’s not the theme I want to pursue today. Perusing some other Industrial ETF portfolios, I realized I’d have to step back in time. Data-driven algorithmic tools have long been a big part of my process. So I wish I could screen for an Industrial ETF. But that can’t work if I can’t accept the data. So I had to resort to the old-fashioned approach. I ditched the automation. I instead used HI (Human Intelligence). That meant looking through the portfolios and choosing the one whose names I deemed the best representative of the theme in which I wanted to invest. There is no perfect list. (Actually, if you look at stocks held in thematic ETF portfolios, you’ll find many whose conformity to the stated theme ranges from questionable to “Are they kidding!”) But I take seriously the famous words of British logician Carveth Read (and mistakenly attributed by many to John Meynard Keynes)… “It is better to be vaguely right than exactly wrong.” (Exactness is never possible since we necessarily invest for the unknowable future.) So my goal is to find a portfolio that’s close enough. I ultimately chose the Invesco Dorsey Wright Industrials Momentum ETF (NASDAQ: PRN). The runner-up was the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR). Legally and technically, these are both passive funds. That’s because they each “track,” rather than trying to beat, an index. This is standard ETF-speak for all but a small number of openly “active” funds. But sometimes, the index a fund passively tracks comes from a lot of HI (in case you forgot, that’s Human Intelligence). XLI and RSPN are traditionally passive. They track those S&P 500 stocks GICS says are Industrial. PRN and FXR are what I call passive-aggressive. The industrials indexes they track are human designed for superior outcomes. The AlphaDEX indexes First Trust ETFs track uses a multifactor value-growth quant model. If you’ve ever used the Seeking Alpha Quant ratings (which I heartily recommend), then you know what a factor model is. AlphaDEX, Seeking Alpha, and many other factor models I’ve created and used, all fall within the same broad intellectual family. They differ in the details of what they do. First Trust gives a lot of information on AlphaDex in their prospectuses, but, understandably, not enough for you to copy their intellectual property. I’m comfortable with it and was strongly considering FXR. PRN has a different, simpler, approach. It uses a momentum model which considers stock price strength over various periods. Momentum, in isolation, scares me. It’s a perfect way to get into a hot area only to find things changing and stocks going over a cliff. But Momentum combined with other things can be quite powerful. Momentum tells me the street likes what it sees and is putting its money where its opinions are. I’m happy to get that extra support if I have other reasons for reaching favorable opinions. When I go Quant, those other reasons are typically tied to other factors like growth, value, quality or sentiment. I assume the Seeking Alpha Quant model uses Momentum the same way. To pick an Industrial ETF, I’m using judgement rather than quant factors. Even so, I appreciate the strong support I get from the Momentum camp. And in fact, judgment plus momentum would have given PRN a big edge over FXR in the past five years. StockCharts.comPRN outperformed more often than not. And PRN has opened its lead over FXR most recently, as the secular theme has become more prominent. Look, too, at the charts for PRN and the plain-vanilla equal-weight RSPN ETF since PRN’s October 12, 2006, debut: StockCharts.comFor most of its life, PRN and RSPN have gone nip and tuck with one another. So for much of the past 18 or so years, the PRN Industrials classification and momentum model haven’t produced meaningfully different results. But as we see when we look in the upper-right corner, the most recent period, PRN pulled way ahead. Now, let’s not completely abandon traditional factors. Here, for starters, are median year ahead growth estimates PRN, FXR and the SPDR S&P 500 ETF (SPY). Author's computations and summary from data displayed in Seeking Alpha Portfolios(Statistics lovers might wish to see position weighted averages. I computed these. They don’t change the conclusions. But oddball data items occur with annoying regularity. And when they happen for larger weighted positions, as often happens, they can produce irritatingly whacky results.) I can’t say that any of these estimates reflect a year-ahead hard-landing recession. That’s understandable. Economists still can’t seem to make up their minds whether we’ll get one. But we can assume they do, at least, reflect some of the softening we’re seeing in consumer and business spending. Clearly, though, the PRN portfolio companies are, on balance, expected to do better than those in FXR and SPY. This supports my conclusion that PRN is a bona fide secular industrial play. Here now are median fundamental and valuation ratios for PRN, FXR and SPY. Author's computations and summary from data displayed in Seeking Alpha PortfoliosThis data, too, supports my choice of PRN. Here are PRN’s Industry allocations as compiled by Invesco, the fund sponsor. Invesco.comFive of the top six allocations (ex-Aerospace & defense) are hotbeds for secular growth. These make up 73.51% of the portfolio. We can boost that to 78.2% if we add in Containers & Packaging and Machinery. (You’ll notice two tiny allocations scroll off the bottom of the Invesco visual… These are Professional service (1.8%) and Investment Companies (0.7%).) I’ll admit, the main industry exposures don’t necessarily make you jump up and down shouting “Hooray for innovation!” But first impressions can deceive. There’s more to many of these companies than meets the casual eye. I’ll address these later on as I write about individual firms. Important Fine Print FXR and PRN are both small ETFs. But of the two, FXR is a lot larger. Assets Under Management (AUM) is $1.93 Billion for FXR. PRN’s AUM is only $230.67 million. But we cannot dismiss PRN as being too small. ETF AUM is not at all equivalent to a stock’s market capitalization. ETF shares issued on day one are not typically increased by secondary offerings every now and then. And they aren’t repurchased like a company’s stock. (So website that report ETF market capitalization often get it wrong. They know the share prices. But they often use badly obsolete data for the number of shares.) For ETFs, a complex exchange mechanism involving “authorized participants” (APs) creates and eliminates ETF shares every day. And dta vendors don’t usually track this. (The ones I’ve used don’t even understand it.) I won’t go too deeply into the weeds. Just know that APs provide baskets of stocks that line up with the ETF’s portfolio. In exchange, they receive “creation units.” APs also can offer cash and receive stock baskets. In the end, if you place an order to trade PRN shares… it will get filled. The other party might be another investor. Or your order might get filled as a result of an APs’ activities. Here’s the important point… PRN’s liquidity isn’t based on the ETF only having about $230 million in AUM. Instead, it’s based on how readily the APs can trade the stocks within the portfolio. And most of the stocks in PRN’s portfolio have market capitalizations well into the billions. The supposedly the least liquid stock is American Superconductor (AMSC). Its market capitalization is about $500 million. And its 3-month daily dollars traded (volume times price) is $7.2 million. H&E Equipment Services (HEES) is the second least liquid. Its market cap is $1.8 billion. It’s 30-day average dollars traded is $13.4 million. APs can easily trade those stocks, and all the other PRN-owned stocks. And by the way, this is why shares of ETFs, unlike those of closed end funds (CEFs), trade at or extremely close to asset value. Except in the temporary case of rare flash crashes, APs will arbitrage as needed to take advantage of and eliminate any meaningful premium or discount. Think of ETFs as CEFs done right. The main risk with tiny ETF AUM is that the fund sponsor will decide the fund isn’t generating enough fees. But don’t worry if it decides to liquidate the ETF. You’ll get advance notice. And if you hold until liquidation day, it’ll show up in your brokerage account as if you sold the stock. You'll get 100 cents to the dollar. The other issue is the expense ratio. Unless the sponsor chooses to subsidize expenses in whole or part, these will have higher ratios. The smaller the AUM, the less able it is to cover fixed expenses. PRN has a 0.60% expense ratio. That tops the 0.47% ETF Database average according to VettaFi. FXR’s expense ratio is 0.61%. Ratios for the larger XLI and RSPN offerings are 0.09% and 0.41% respectively. But bear in mind that all performance statistics are based on share prices in the market. So what you see in price charts is net of expense ratios. If a high-cost fund outperforms a low-cost fund, that means the former really earned its fee. To that, I say “Bravo!” I especially say that here, given that I prefer PRN’s portfolio. Risks However hard I worked to find an Industrial ETF with a good secular-growth portfolio, I’m not going to go fanatic. Any time anyone says “Industrials,” we have to hear cyclical. The secular angle speaks to a less intense cyclical influence. But cyclicality can’t completely vanish. (In fact, nothing, not even famously “defensive” sectors, are completely immune to the economy.) If companies in the super-secular semiconductor and software groups feel the impact of antsy corporate spending, delayed projects and stretched orders, so too can even the most exciting among secular industrial firms. As we saw in the tables above, the companies PRN owns have the financial and fundamental fortitude to withstand unexpectedly lean times. But still, we know what happens to stocks if guidance is reduced (or raised to a lesser extent than expected)… Look out below. Nothing like that is likely to cripple the overall investment case for PRN. But be aware that nobody seems to really know where interest rates and the economy are going near term. There’s also election risk here. I’m not crazy enough to dare predict whether Biden will be re-elected in November. Trump, the alternative, is no fan of Bidenomics (although I can’t imagine him seriously hating Biden’s trade restrictions against China). But for better or worse, from Trump’s vantage point, Bidenomics (i., e., his industrial policy) is bringing a lot of jobs to MAGA country. So regardless of what Trump says when he’s talking into a camera or posting on Truth Social, I find it hard to imagine he’d really take action to cancel Biden’s subsidies or incentives. (Cosmetic tweaks seem more likely.) What to do About PRN Here's the price chart for PRN. StockCharts.comIt's not perfect. Chaikin Money Flow, which depicts the strength of demand from institutional investors, is in negative territory. But the Chaikin Oscillator, which measures demand from all investors, just eked its way into the bullish zone. I'd like to see the 10-day exponential moving average (EMA) above the 50-day EMA. It's not there. But it looks like the bullish crossover will happen any day now. As with the three secular-oriented sector ETFs about which I recently wrote (XHB - Homebuilding, SOXX - Semiconductors and IGV - Software), I think much of the near-term PRN risk is market-based. If the Fed turns out to be surprisingly hawkish on interest rates, PRN will suffer. But it wouldn't be by any means be alone. A heck of a lot of stocks and ETFs would also get hammered. So to me, PRN’s downside is in line with that of the overall market. But because of its secular theme, I see it as having a lot more upside potential. I may sound like a broken record to those who’ve been following me since my return to Seeking Alpha at the beginning of this month. I said the same thing about the other XHB, SOXX and IGV. That’s simply because I chose to write about a theme I really like. But if you want to see my inner bear, be patient. There are other stocks and ETFs I hate. I’ll get around to writing about some of them, too. But for now, back to PRN… As I’ve said before, my investment stance depends mainly on whether I think a stock will be better than, in line with, or worse than the market. Here’s how I apply that to the Seeking Alpha rating system:  “Strong Buy” means I see the stock as being better than the market, and I’m bullish about the direction of the market. “Buy” means I see the stock as being better than the market, but am not confident about the market’s near-term direction. “Hold” means I see the stock as moving in line with the market. “Sell” means I see the stock as being worse than the market, but am not confident about the market’s near-term direction. “Strong Sell” means I see the stock as being worse than the market, and I’m bearish about the direction of the market.   Based on this scale, I’m rating PRN as a “Buy.”","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2435068893"}