CSMD: Too Expensive On Several Fronts, But This SMID Growth ETF Is One To Watch

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SARINYAPINNGAM Investment Thesis The Congress SMID Growth ETF (NYSEARCA:CSMD) is a relatively new actively managed fund holding approximately 40 small- and mid-cap stocks for their high-growth ...

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Beauty Inc.","BK4129":"建筑与工程","FIX":"美国舒适系统","CSMD":"CONGRESS SMID GROWTH ETF","BK4567":"ESG概念","BK4585":"ETF&股票定投概念","IJK":"标普中型成长股400指数ETF-iShares","LU0053671581.USD":"摩根大通美国小盘成长股 A(dist)"},"translate_title":"CSMD：在几个方面都太贵了，但这款SMID Growth ETF值得关注","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"IJK":1,"VMI":1,"VBK":1,"STRL":1,"SMID":1,"QMID":1,"JSMD":1,"FIX":1,"FDN":1,"CSMD":1,"CAML":1,"ELF":1},"content_text":"SARINYAPINNGAM Investment Thesis The Congress SMID Growth ETF (NYSEARCA:CSMD) is a relatively new actively managed fund holding approximately 40 small- and mid-cap stocks for their high-growth characteristics. Initially, I was skeptical, given the fund's 0.68% expense ratio and my neutral rating for the Congress Large Cap Growth ETF (CAML). However, my fundamental analysis revealed a fund that's competitive in its category on growth and quality, the latter of which is linked to the solid long-term returns of Congress' small- and mid-cap growth mutual funds. I'm disappointed in its valuation, which I found to be excessive, but CSMD could benefit from lower rates more than most, and I encourage you to place it on your watchlist as a potential alternative to low-cost plain vanilla funds. CSMD Overview Strategy Discussion Since CSMD is actively managed, I'm unable to determine its precise strategy. However, CSMD's prospectus and website indicate the following: 1. The fund's primary benchmark is the Russell 2500 Growth Index. 2. The Investment Policy Committee consists of three portfolio managers and two research analysts. 3. The Committee selects a small number of stocks (35-45) with consistent profitable growth using a bottom-up approach that emphasizes free cash flow and other quality characteristics. 4. Congress Asset Management looks for companies with competitive positions in stable or growing industries and management teams that are aligned with stakeholders' interests. 5. Historical returns for the Congress Small Cap Growth Institutional Shares (CSMCX) and the Congress Mid Cap Growth Institutional Shares (IMIDX) are available from November 1, 2012. Lastly, the Fact Card lists some statistics that provide insight into the team's focus. As you can see, CSMD and its benchmark have similar five-year estimated earnings per share growth rates as of June 30, 2024. However, CSMD has a substantial advantage in quality, as measured by return on equity, operating margin, and long-term debt to capital. As I suggested earlier, high quality is a must, and while screening broad large-cap indices to improve quality only sometimes works, the approach can have significant benefits for the small- and mid-cap segments.   Congress Asset Management Performance Analysis The Congress SMID Growth Portfolio has easily outperformed the Russell 2500 Growth Index since its inception on July 1, 2013. As shown below, it's also delivered more than double its benchmark returns over the last five years (15.8% vs. 7.6% average annualized). Although these returns are not for CSMD, as it only launched last August, they speak to the firm's success rate for this segment.   Congress Asset Management Between September 1, 2023, and July 23, 2024, CSMD gained 13.76%, compared to 14.63% and 20.95% for the Vanguard Small-Cap Growth ETF (VBK) and the iShares S&P Mid-Cap 400 Growth ETF (IJK). These results are disappointing but do not mean much, given the short time frame.   Portfolio Visualizer However, I am encouraged by the long-term results of CSMCX and IMIDX, Congress' small- and mid-cap growth mutual funds. As shown below, CSMCX has easily outperformed VBK over the last five years (14.09% vs. 6.68% annualized returns), while IMIDX has kept pace with IJK over the same period (10.10% vs. 10.29% annualized) and has outperformed since November 2012.   Portfolio Visualizer It seems Congress does best with small caps, so I was relieved to find CSMD's weighted average market cap was $11.44 billion, only slightly higher than VBK's $9.45 billion figure. Furthermore, Morningstar's style boxes indicate it's right on the line that divides small- and mid-caps, so I'm satisfied CSMD holds enough stocks in the small-cap space that can potentially lead to the impressive returns shown earlier.   Morningstar CSMD Analysis Sector Allocations CSMD is somewhat diversified at the sector level, as its largest exposure is to Industrials at 23.06%. However, it also has similar allocations to Health Care and Technology, while IJK and VBK have only 20% allocated to one sector (Industrials and Technology, respectively).   The Sunday Investor I also want to compare CSMD with the WisdomTree U.S. Midcap Quality Growth Fund ETF (QMID) and the Janus Henderson Small/Mid Cap Growth Alpha ETF (JSMD). I selected these ETFs as they have similar weighted average market caps as CSMD. In addition, QMID looks better diversified, while JSMD also overweights the same three sectors as CSMD. CSMD Fundamental Analysis By Company The following table highlights selected fundamental metrics for CSMD's top 25 holdings, totaling 71.17% of the portfolio. Comfort Systems USA (FIX), a company specializing in HVAC and energy efficiency solutions, is the top holding with a 5.47% weighting and 38.51% one-year expected earnings per share growth.   The Sunday Investor Here are three additional observations to consider: 1. CSMD trades at an expensive 32.63x forward earnings (27.32x harmonic average), slightly higher than VBK's 32.39x (25.35x harmonic average) but much higher than the other three peers. One consideration is that 41/42 of CSMD's holdings have positive expected earnings, a statistic that's only true for about 83% of VBK's holdings. Companies with negative earnings are excluded from the P/E calculation, so VBK benefits the most from this and is the least attractive from a value perspective. However, valuation is still a glaring weakness for CSMD. Its 8.46 weighted average price-book ratio is the highest, and its 2.32/10 sector-adjusted value score is the lowest. Valuation is one of Congress Asset Management's key investment tenets, but in my opinion, it appears it's not taken very seriously.   The Sunday Investor 2. CSMD's Fact Card showed outstanding profitability metrics compared to its benchmark, the Russell 2500 Growth Index, which has a slightly lower $8.38 billion weighted average market cap, per its fact sheet. Still, CSMD's 7.50/10 sector-adjusted profit score is only marginally better than IJK and QMID and 0.30 points less than JSMD. Providers of factor-based funds often choose Russell Indices as benchmarks because there is no profitability requirement for membership. However, once you use S&P Dow Jones Indices, which requires four quarters of profitability for initial entry, the quality advantage diminishes. IJK, which tracks the S&P Mid-Cap 400 Growth Index, has stronger ROA, ROE, and ROTC ratios, while CSMD has the advantage on asset turnover (sales / average assets) and free cash flow margins. Still, it has no significant quality advantage over its peers, except that it could benefit more if interest rates decline. As shown below, CSMD ranks relatively poor on metrics measuring its constituents' short-term obligations, like current ratio, quick ratio, and interest coverage, even if long-term debt seems manageable.   The Sunday Investor Selecting companies with manageable debt loads is a focus for the team. In the Q2 2024 commentary for the Congress SMID Growth Portfolio, management writes: We believe the transition to lower interest rates will be slow and longer-term rates are likely to remain elevated, which will have significant investing implications. 3. CSMD delivers on its promise of selecting high-growth stocks. Its 15.51% one-year estimated earnings per share growth rate is the best in this peer group and #13/35 best among all the small- and mid-cap growth ETFs I track. Top holdings like e.l.f. Beauty (ELF) have growth rates upwards of 40%, and CSMD's Construction & Engineering stocks have an average growth rate of 28%, supported by excellent sales and earnings surprise figures last quarter:  Comfort Systems USA (FIX): 29.63% Valmont Industries (VMI): 30.51% Sterling Construction (STRL): 21.52%  Finally, CSMD's selections have good earnings momentum right now, evidenced by a sector-adjusted 6.45/10 Seeking Alpha EPS Revision Score. This score ranks #15/35 among all small- and mid-cap growth ETFs and #1/23 among those with market caps below $15 billion. Investment Recommendation  CSMD is an actively managed small/mid-cap growth ETF offering competitive growth, solid quality, and excellent earnings momentum. A short-term opportunity might exist if interest rates decline, and the long-term track record of the firm's small-cap growth mutual fund suggests Congress' strategy works well. However, CSMD looks overvalued, and I think it's prudent to wait for a better price point. Therefore, I've rated CSMD a \"hold\" for now and plan to provide more updates as the year progresses. Thank you for reading.","kind":"highlight","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":"4.29.3","shortVersion":"4.29.3","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/2454765373"}