I'm going to be picking on Morningstar again in this post. You can click here for the article I am talking about.
The article spells out their way of applying bottoms up analysis to ETFs. I have written before why I think this makes no sense and the above article, written by Morningstar, makes the case.
Their method involves calculating a fair value for just about every component and then figuring whether as a group the holdings are cheap or expensive. The article said that as was the case seven months ago energy is still expensive. Uh-huh. In that seven months iShares Energy (IYE) is up 30%, iShares Natural Resources (IGE), which is mostly energy stocks, is up 35% while the S+P 500 is up just under 10%.
The wording is not exactly clear to me but what I think I am reading is that they did not think owning an energy ETF was a good idea seven months ago and it's not a good idea now.
Their approach misses the forest amongst the trees. I have been writing about being overweight energy for the entire life of this blog. I think long time readers will agree that this has not been one of my more brilliant calls because of how obvious it has been. I can't begin to imagine how long it took for them to come to their conclusion about energy being overvalued but I would bet it took a little longer than it took me to conclude "yeah, energy looks pretty good."
The point of this post is that this sort of missing the point analysis is a ringing endorsement for seeking out and implementing simple themes where possible. Simple themes are not always there but when they are....
Investing might be complicated and take a lot of time and so on but the work attempted by Morningstar makes it far more difficult than it needs to be, and it missed one of the simplest dumb-money themes of the last few years to boot.
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4 comments:
If oil was going back to $40/barrel, would XLE be overvalued? Where does XLE become overvalued?
I don't think I understand the point. Is their analysis wrong (you can't use your valuation estimate of the underlying stocks to estimate the value of an etf)? Or do you just think that their estimates of the values of the underlying stocks is wrong?
You seem to explicitly say that the "sum of the parts" analysis is wrong, but your arguments sound more like you think they are undervaluing all energy stocks.
I'm not a fan of bottom up as a starting point. I think thrying to evaluate a sector in this manner, just valuation makes no sense because of ck of forward looking analysis of the sector. What has driven energy prices and stocks ahs been supply and demand of oil (or perceived S&D). There work does not take that into account.
Most of those people at the Morningstars of the world have never invested another person money, their life savings...or been responsible for what happens to it---good or bad. I used to read all about people "paper-trading"...my argument was that
if it's not real money, you are not getting real returns.
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