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Category: Sectors

Procure the Entrepreneurs: The Enterprising ENTR ETF

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Treasury yields are rising, making an already tricky fixed income environment all the more thorny to navigate. Some investors may want to consider ditching government bonds in favor of entrepreneurial companies with the ERShares Entrepreneurs ETF (ENTR).

ENTR 3 Year Performance

ENTR tries to reflect the performance of the Entrepreneur 30 Index, which is comprised of 30 U.S. companies with the highest market capitalizations and composite scores based on six criteria referred to as entrepreneurial standards. ENTR primarily invests in US Large Cap companies that meet the thresholds embedded in their proprietary Entrepreneur Factor (EF).

In a recent interview with financial news network Cheddar, ERShares’ Joel Shulman outlined the case for entrepreneurial companies in the current climate, noting “that interest rates are still low based on historical levels and actually need to rise a little in order for the Fed to deploy future monetary policy solutions. He reminds listeners that between 2003-2007 the Fed actually had 18 rate hikes while the Markets appreciated 50%,” according to ERShares.

A Powerful Paradigm Shift for Entrepreneurial Investors

The ETF “incorporates a bottom-up investment orientation, powered by artificial intelligence (AI), that stands above other investment factors such as: momentum, sector, growth, value, leverage, market cap (size) and geographic orientation. Moreover, with the aid of AI and Thematic Research, ERShares incorporates a macro-economic, top-down approach that integrates changing investment flows, innovation entry points, sector growth and other characteristics into a dynamic, global perspective mode,” according to ETFdb.com.

Adding to the case for ENTR is that last week’s market selloff caused by rising Treasury yields was perhaps overdone when it comes to equities.

Shulman notes “that much of the market’s response to interest rate spikes is appropriate for the bond markets, but may have been an overreaction for equities.”

ERSX: A One-Stop ETF to Rectify Domestic Bias

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Investors often have a domestic basis, particularly with small cap stocks. They can help rectify large cap, domestic tendencies with the ERShares NextGen Entrepreneurs ETF (ERSX).

ERSX selects the most entrepreneurial, primarily Non-US Small Cap companies, that meet the thresholds embedded in its proprietary Entrepreneur Factor (EF). ERShares’ ETF delivers compelling performance across a variety of investment strategies without disrupting investors’ underlying risk profile metrics. Their geographic diversity enables them to harness global advantages through additional returns associated with currency fluctuations, strategic geographic allocations, comparative trade imbalances, and relative supply/demand strengths.

Data confirm U.S. investors are under-allocated to international small caps.

“International Mid/Small-Cap stocks market value is 6% of the total world’s equity market, but US investors’ allocation is just 1.6% in mutual funds to this asset class,” according to Seeking Alpha.

ERSX 1 Year Performance

ERSX Perks

One of the highlights of small cap equity investing is the ability to capitalize on value-added growth companies that can provide room for more future gains. On the opposite end of the spectrum, large cap equities like big tech stocks may have already reached their peaks.

“One reason US investors should consider international stocks at this time is the trade-weight value of the USD is declining, which benefits international stocks,” adds Seeking Alpha.

Small cap investors already know that looking at equities outside the large cap universe can yield substantial gains, but one area they may not have considered is looking abroad.

International small caps have “generated annual returns of only 6.7% for the past 10 years compared to 14% for the U.S. Large Company Index (per IFA data). However, valuations are attractive and there are two emerging catalysts that could propel the sector to outperform U.S. large caps in the coming years,” notes Seeking Alpha.

International small caps are generally export-oriented, globally structured, innovative, and have a high to dominant share of a niche market, often one in which the U.S. counterparts don’t compete effectively.

The Small Cap ERSX ETF: Hidden Gems Lie Abroad

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Investing in international small caps can be an exercise in finding hidden gems. The ERShares NextGen Entrepreneurs ETF (ERSX) makes that work easier.

ERSX selects the most entrepreneurial, primarily Non-US Small Cap companies, that meet the thresholds embedded in its proprietary Entrepreneur Factor (EF). ERShares’ ETF delivers compelling performance across a variety of investment strategies without disrupting investors’ underlying risk profile metrics. Their geographic diversity enables them to harness global advantages through additional returns associated with currency fluctuations, strategic geographic allocations, comparative trade imbalances, and relative supply/demand strengths.

The ERShares ETF is useful for gaining exposure to an often overlooked asset class.

“Despite U.S. investors’ being very comfortable with international investing, small-cap companies (market cap of $300 million-$2 billion) outside the United States have generally flown under the radar. Yet upon closer review, they stand out for several attractive reasons,” reports Investment News. “For starters, of the more than 6,000 publicly traded global small-cap stocks, only about 2,000 are domiciled in the U.S., while two-thirds are based abroad. And a large proportion of those companies are in developed and emerging countries with established markets and liquidity. This represents an extremely large and deep pool of companies that many U.S. investment portfolios simply aren’t exposed to.”

ERSX 1 Year Holdings

The Right Way to Small Caps?

Small cap investors already know that looking at equities outside the large cap universe can yield substantial gains, but one area they may not have considered is looking abroad.

ERSX isn’t any old small cap ETF. It blends domestic and international exposure, which is relevant at time when many markets are betting international smaller stocks will top U.S. equivalents. Non-U.S. equities are poised to take flight, and it’s possible that this asset class is in for a substantial period of out-performance.

“International small caps, while generally considered riskier than the other parts of equity markets, also exhibit lower correlations to other asset classes, including to their U.S. counterparts. This may be viewed as both an attractive and particularly timely characteristic that can help U.S. investors prepare for the inevitable rise in interest rates and the potential resulting market turbulence, provided they’re willing to look beyond the U.S. and take advantage of the opportunities globally,” adds Investment News.

ERSX Holdings

Are Your Small Cap ETFs Truly ‘Entrepreneurial’?

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Even with some recent weakness in equities, small caps and foreign stocks remain appealing. That script underscores the continued allure of the ERShares NextGen Entrepreneurs ETF (ERSX).

ERSX selects the most entrepreneurial, primarily Non-US Small Cap companies, that meet the thresholds embedded in its proprietary Entrepreneur Factor (EF). ERShares’ ETF delivers compelling performance across a variety of investment strategies without disrupting investors’ underlying risk profile metrics. Their geographic diversity enables them to harness global advantages through additional returns associated with currency fluctuations, strategic geographic allocations, comparative trade imbalances, and relative supply/demand strengths.

ERSX 1 Year Total Return

“The year-to-date return for small-caps through the end of February was a remarkable 25 percentage points greater than that of large-caps (as measured by the 20% of stocks with the smallest market caps vs. the comparative quintile of the largest),” reports Mark Hulbert for the Wall Street Journal. “While it isn’t unexpected for small-cap portfolios to beat large-caps over time—a long-term tendency that Wall Street analysts refer to as the ‘size effect’—what is unusual is the magnitude of the outperformance. It has averaged just 0.9 percentage point over all two-month periods since 1926, according to data from Dartmouth professor Ken French.”

The unique factor strategy offered by ERSX is ideally suited for investors looking to capitalize on both growth and value opportunities found with ex-U.S. smaller stocks.

ERSX Leadership

Why focus on entrepreneurial companies? Founder-run entrepreneurial companies have shaped the economy by investing in its people and innovation leading to exceptional growth. Having the right Founder-CEO can make an important difference. The differential between the time period with a Founder-CEO and without is approximately 7% in excess return.

See also: The Small Cap ERSX ETF: Finding Hidden Gems Abroad

“Indeed, according to several researchers, small-caps’ recent strength may actually be something else in disguise—that is, it may have to do with factors other than just size, such as the battle between growth and value stocks,” according to the Journal.

Entrepreneurial companies were better able to shift gears to adapt to the new market environment, swiftly pivoting their strategies to protect people from the pandemic and support people adapting to new living routines. They also led the way, irrespective of market cap and geography. Many global companies also pivoted well during uncertain markets and outperformed in bull markets.

ERSX Holdings

Believe It or Not, But Growth May Be the Real Value Destination

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Suddenly, value stocks are generating plenty of buzz, some at the expense of their growth rivals. However, not all value stocks are good values. Investors can avoid the pitfall of value traps with the ERShares Entrepreneurs ETF (ENTR).

ENTR tries to reflect the performance of the Entrepreneur 30 Index, which is comprised of 30 U.S. companies with the highest market capitalizations and composite scores based on six criteria referred to as entrepreneurial standards. ENTR primarily invests in US Large Cap companies that meet the thresholds embedded in their proprietary Entrepreneur Factor (EF).

ERShares founder Joel Shulman “advises listeners to be careful in buying traditional value stocks at this time. Prospective buyers should be wary of the price levels for debt-rich, declining margin, ‘value stocks’ that are at risk for a major price correction,” according to the issuer.

ENTR 3 Year Total Return

The Growth vs. Value Debate

Growth stocks are often associated with high-quality, prosperous companies whose earnings are expected to continue increasing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. Still, data suggest the growth/value premium isn’t overly elevated relative to historical norms.

Some “traditional, value stocks that have also reached high levels while simultaneously flirting with bankruptcy (Avis, etc). Shulman believes that growth stocks will bounce back,” notes ERShares.

Growth stocks may be seen as exorbitant and overvalued, causing some investors to favor value stocks, which are considered undervalued by the market. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain priced compared with their competitors.

ERSX: A Formidable Small Cap Stimulus Bet

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Americans are already receiving their stimulus checks from Uncle Sam. Many market observers believe all the cash will lead investors into riskier assets.

It’s probable that many investors will allocate stimulus cash to high growth names, a theme that could benefit the ERShares NextGen Entrepreneurs ETF (ERSX).

ERSX selects the most entrepreneurial, primarily Non-U.S. Small Cap companies, that meet the thresholds embedded in its proprietary Entrepreneur Factor (EF). ERShares’ ETF delivers compelling performance across a variety of investment strategies without disrupting investors’ underlying risk profile metrics. Their geographic diversity enables them to harness global advantages through additional returns associated with currency fluctuations, strategic geographic allocations, comparative trade imbalances, and relative supply/demand strengths.

“On the one hand a massive cash infusion piled on top of an already recovering economy will continue to stoke inflationary fears. Casualties to inflationary concerns include both bonds and equities, with the latter being punished for higher discount rates applied to distant cash flows,” said ERShares COO and Chief Investment Officer Eva Ados in a Bloomberg interview. “Offsetting market selling pressures associated with inflation (primarily by institutional investors), we are likely going to also experience a hearty infusion of retail (day traders) investors who will attempt to parlay their newfound largesse into a larger windfall.”

ERSX 1 Year Performance

Another Catalyst for ERSX?

With small caps already strong, ERSX doesn’t necessarily need the benefit of stimulus cash, but it makes for a sound destination for investors with long-term outlooks due to its exposure to healthcare and technology stocks with growth profiles.

One of the highlights of small cap equity investing is the ability to capitalize on value-added growth companies that can provide room for more future gains. On the opposite end of the spectrum, large cap equities like big tech stocks may have already reached their peaks.

“We believe the strongest gains will accrue to recently beat-up high flying growth stocks (including popular ADRs) with heavy concentrations in the Technology and Health Care sectors,” said Ados. “Growth stock gains should dominate inflationary fears for much of next week, though interest rate spikes (especially among the price sensitive 10-year bond), could delay a tech recovery for an extended period of time.”

Why Growth Is Offering More Value than Meets the Eye

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For the first time in what feels like an eternity, value stocks are topping their growth rivals, but investors can avoid value clunkers and bet on a growth trajectory with the ERShares Entrepreneurs ETF (ENTR).

The ERShares fund is worth a look over the near-term because its growth stocks are offering surprising levels of value.

“With the market keeping a keen eye on interest rates and its focus on punishing high-flying growth stocks with every basis point increase in the 10-year treasury, it’s sometimes useful to take a step back and examine the big picture,” said ERShares founder Joel Shulman in a recent note. “While it’s true that stocks, of all kinds (growth and value), are fundamentally priced based on discounted future cash flows, it should not necessarily be true that growth stocks should receive a steeper drop in price with rising interest rates. While the basic math of reducing today’s stock price based on discounting future cash flows at a higher rate cannot be denied, neither can the fact that the PRIMARY driver in growth stock valuation is the GROWTH itself.”

ENTR tries to reflect the performance of the Entrepreneur 30 Index, which is comprised of 30 U.S. companies with the highest market capitalizations and composite scores based on six criteria referred to as entrepreneurial standards. ENTR primarily invests in US Large Cap companies that meet the thresholds embedded in their proprietary Entrepreneur Factor (EF).

ENTR All Time Performance

ENTR: A Prime Avenue for the Growth Rebound

“When businesses enter their hyper-growth phase, they enter an extremely uncertain period and seasoned analysts should already discount future cash flows at an appropriate level corresponding to the risk,” adds Shulman.

“The key drivers to the valuation of growth stocks correspond overwhelmingly to the top-line revenue growth (that can exceed 100% rate per year) and should not, from the same mathematical perspective be affected by relatively immaterial or insignificant 5-10 basis point increases in a discount rate.”

The bottom line is thus: recent weakness in growth stocks may be an overreaction to rising Treasury yields.

Inflation Isn’t the Only Reason Rates Are Rising

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Market participants are getting a steady diet of the rising Treasury yields story, and much of the rationale for the spike implicates increasing inflation expectations.

However, that may not be the only reason, and a deeper examination reveals that if rising inflation proves more muted than some market observers believe, growth stocks and funds, such as the ERShares Entrepreneurs ETF (ENTR), could soon be back in favor.

“Multiple factors can affect interest rates, and inflation may not be the problem. Interest rate increases could be the result of foreigners selling U.S. treasuries,” said ERShares COO and Chief Investment Strategist Eva Ados. “Moreover, with each sale pushing bond prices downward, we might experience the triggering of stop-loss sales, which further exacerbate price drops/yield increases. We should bear in mind that $7T of U.S. debt is held by foreign buyers $1T each held by China and Japan, and China sold bonds the last five months of 2020.”

ENTR tries to reflect the performance of the Entrepreneur 30 Index, which is comprised of 30 U.S. companies with the highest market capitalizations and composite scores based on six criteria referred to as entrepreneurial standards. ENTR primarily invests in US Large Cap companies that meet the thresholds embedded in their proprietary Entrepreneur Factor (EF).

ENTR 1 Year Total Return

Inflation Not as Hot as Some Think

Amid more chatter about inflation, some investors think the situation is increasingly worrisome, but other data points indicate otherwise.

“Inflation is currently running below 2.4% and should not be the problem going forward. Even if GDP growth is expected to reach 6.5% this year, there are still 9.5M Americans out of work and plenty of distressed industries with companies that may not survive past Q2,” notes Ados.

“Considering the nature of tech rise, growth could be the new Value. The overreaction to growth a few weeks back could now have shifted to an overreaction to value stocks. Ados believes that entrepreneurial growth companies now offer superior potential upside compared to value stocks,” concludes ERShares.

Vulnerable Markets Offer Opportunities, Says ERShares’s Ados

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Though the markets currently possess several vulnerabilities, there remains plenty of potential for investors, said ERShares’s COO and chief investment strategist Eva Ados in an interview with TD Ameritrade.

“It’s a stock picker’s market right now,” she said. “There are opportunities in value, and there are opportunities in growth.”

In the current markets she recommends a selection of the FAANGS: specifically, Facebook (FB), Google (GOOGL), and Amazon (AMZN). These companies are the “best of both worlds” in terms of growth and value, and they have been able to capitalize on the switch to e-commerce because of the pandemic, said Ados.

They’re “behaving like a regular growth stock,” with modest P/E ratios and valuations coupled with extraordinary growth. Facebook reported 50% revenue growth with a P/E of 25, Google reported 30% revenue growth with a P/E of 28. Meanwhile, Amazon reported 45% revenue growth and an EBIT growth of 35%.

“You have extraordinary margin when it comes to Amazon, and all of these companies,” said Ados.

Few Earnings Surprises for Tech

Broadly speaking, the tech sector isn’t participating much in earnings winnings, because earnings were coming from such a high base already. “It’s really hard to see earnings surprises” right now, said Ados.

As a result, investors are chasing value stocks still offering tantalizing earnings, but Ados warns that the value factor is coming from a low base.

“The danger there,” she explains, “is that we are pushing them to frothy levels.”

These tech stocks may never reach the levels they were at before the pandemic because our behaviors have changed, putting their business models at risk of high debt leverage, drastically decreased revenues, and even bankruptcy.

“We don’t think that chasing value companies just on the basis of earnings surprises is the right thing to do right now,” she added.

Risks Persist in the Market

The market has swung from growth to value quickly, says Ados. Hyper growth tech peaked on February 20th; then in mid-March deep discount value peaked; and now the broader indexes have peaked, hitting all-time highs.

“As a result, now the system is very vulnerable to any shock,” she added. The risks in the short-term include new mutations of the coronavirus, and whether or not vaccinations will work on them.

Another concern is the behavior of the retail investor. The recent record influx of retail investors to platforms such as Robinhood has led to markedly increased investing around specific companies. Millennials tend use online forums and social media to communicate about their ideas “and as a result they crowd the same names,” explains Ados.

These investors have collectively pushed specific growth companies higher. The thing to watch for, she adds, is a potential mass exodus from these same companies, causing them to “drop significantly.”

Value may be in the eye of the beholder, but you won’t find it at SeaWorld.

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By Joel M Shulman Ph.D., CFA, ERShares Founder & CIO

Perhaps lost among investors in their mad dash to buy value stocks is the potential to bid up deep discount equities well beyond reasonable levels. While it is commonplace to bemoan the valuation of Tesla, which at 7X return in 2020 and an $800B market cap, would be on track to eclipse global GDP in less than 3 years. It is perhaps less commonplace to recognize over-exuberance among so-called value stocks. This may no longer be the case. Take for example a few of the neglected companies now approaching record price levels. This list includes well-known entities such as Marriott, Bloomin’ Brands (parent to Outback Steakhouse, Bonefish, etc.), and SeaWorld. Avis is also nearing a 15-year high and gets honorable mention for this list. Notwithstanding the compelling case that each of these companies deserve a healthy step up from pandemic bottoms, the height of current levels borders absurdity to even the most optimistic, rational investor.

Case in point. Marriott International, a longstanding beacon in the hotel industry, boasts a 94-year history, 7600 properties, and 30 hotel brands in 133 countries. Last year its revenues dipped 50%, coupled with plummeting margins, rising costs, skyrocketing debt levels, and other significant obligations coming due soon. If that weren’t crippling enough, heavily fortified, cash-bearing new entrants such as Airbnb, recently entered the arena with a disruptive approach that threatens the very underpinnings of the hotel industry. These new pioneers provide a variety of accommodations, without burden of capital investment, annual maintenance, or SGA infrastructure. This is almost identical to the case of Uber and Lyft who completely gutted the cab industry through disruptive technology. Moreover, as competitors feast on Marriott’s market share, the parent had to contend with a mountain of debt service arrangements, rising interest rates, and a never-ending supply of angry timeshare owners. Given these reasons it seems very perplexing to witness Marriott’s stock price anywhere close to an all time high level. Perhaps even more surprising than Marriott would be the examples of SeaWorld, Bloomin’ Brands, and Avis. In the past year, each of these companies has been flirting with bankruptcy, yet the first two rest at an all time high price.

SeaWorld Entertainment, still smarting from a 2013 film (Blackfish) and global campaign to boycott and shut down the enterprise, has experienced a catastrophic drop in attendance (81%) while fending off rumors speculating bankruptcy. An examination of the balance sheet suggests a healthy level of cash, but it belies the $2B of expensive debt recently raised (9.5% coupon) which was primarily used to cover past losses and resupply depleted working capital accounts. Recognizing that post-pandemic attendance will surely rise from the prior year’s debacle, it is still unclear how investors could price this stock to an all time high given longstanding neglect to property, plant, and equipment, and future debt hurdles. Bloomin’ Brands provides another puzzle to the over-priced “value” company situation. Parent to familiar brands such as Outback Steakhouse, Bonefish, and Carrabba’s Italian Grill, last year this company experienced significant drops in gross margins and revenues along with soaring debt levels. It has current lease and debt obligations that exceed short-term cash levels yet not unlike the other examples, this stock price has also recently reached the prized all time high accomplishment.

Each of these four examples undoubtedly warrants an increase from pandemic levels. However, it remains a mystery how investors can justify current all-time high price levels. In recent weeks we have witnessed high-flying tech companies fall, on average, 20-30% from market peaks, and in some cases as much as 50-60%. The latter appears to be a floor to the price drop. By contrast, strongly bid-up value stocks have the potential to drop much further. As Hertz, Sears, JCPenney, and other fallen angels have demonstrated quite clearly, the floor to an overvalued, debt-intensive company is not 50 or 60%, but rather 100%. Buyers beware. Price levels corresponding with Marriott, Bloomin’, Avis, SeaWorld, and other overpriced value stocks are vulnerable to a major correction without a chance for recovery. We maintain that investors need to be very careful in buying value stocks now. The value no longer exists in the traditional buckets contained within the Dow Jones and S&P 500. We maintain that it has reverted back to Tech. Prices are low, and we can see an extended rally for a few more weeks.