Who doesn't like a good comeback story?
Three mutual funds are poised to have a breakout year and move to the top of the standings after dismal performances in 2011, S&P Capital IQ research shows.
In fact, one of them already has.
Dylan Cathers, an S&P Capital IQ mutual fund industry analyst, set some daunting criteria and used a sophisticated screening analysis on his firm's extensive database to come up with these funds.
He began by identifying funds with 2011 performances that put them in the bottom 25 percent in the multi-cap-core, value and growth categories. Cathers chose "multi-caps" because they are most representative of the market, as they include small- to large-cap stocks.
To trim the field further, Cathers included only retail funds that have been open to investors for at least three years, have over $25 million in assets, and are run by managements with consistent tenure.
This analysis was followed by an extensive portfolio review of funds, using sister firm's Standard & Poor's stock ratings, as well as his own organization's qualitative and fundamental analysis skills.
"I feel comfortable saying: 'OK, they had a bad year, but we think they're well worth taking a look at," Cathers said of the trio of funds profiled in this article.
Here, then, are the three mutual funds that get especially high ratings based on their prospects from S&P Capital IQ, along with three of their top stock holdings:
1.Ariel Appreciation Fund
Summary: Last year, the fund's total return was a loss of 7.4 percent, as compared to a loss of 2.8 percent for the S&P multi-cap core funds average. The fund's three-year performance, though, is an average annual return of 24.6 percent versus its peers' 16.4 percent.
Ariel has no sales load, and its net current expense ratio of 1.18 percent is below its peer group's 1.38 percent. It's off to a good start, gaining 7.5 percent this year, putting it in the top 9 percent of funds in its category. A few of the top-rated stocks in Ariel's top holdings follow:
Company profile: Dell is one of the world's largest manufacturers of PCs, server and storage products and it also provides IT services.
Analysts' take: The company has an efficient manufacturing/sales model that creates huge cash flow. That can be used to make acquisitions and enter new fields. S&P has a $19 price target on it, a 15 percent premium to its current price.
Company profile: Zimmer is an innovative designer, manufacturer and marketer of orthopedic reconstructive implants, such as artificial knees and hips, dental implants, spinal implants and related surgical products.
Analysts' take: Baby boomers are its target market and that demographic is big and growing fast, so this is a long-term growth story. S&P, in a survey of analysts, found nine "buys" five "buy/holds," with 15 "holds," and one "sell." S&P has a $58 price target on it, a 3.2 percent premium to its current price.
Company profile: Aflac is a seller of supplemental health and life insurance. About 80 percent of its earnings come from Japan and 20 percent from the U.S.
Analysts' take: The irritating Aflac duck is bigger in Japan than here now, as the market there is seeing steady growth due to its huge, older population. S&P found four "buy" ratings, eight "buy/holds," six "holds," and one "sell." S&P gives it a $48 price target, a mere 1.9 percent premium to its current price.
Summary: Last year, the fund lost 5 percent of its value, nearly double the multi-cap core fund peer group's average decline of 2.75 percent. But the three-year total return is excellent at an annualized return of 20.7 percent, versus its peer group's 16.4 percent.
"The fund has no sales load, and its net current expense ratio of 0.97 percent is notably below the peer average of 1.38 percent," writes Cathers. It's off to a blazing start, up 9.5 percent this year, putting in the top 1 percent of the funds in its category. A few of its top-rated stock holdings include:
Company profile: Wells Fargo is one of the nation's largest banks, with $1.3 trillion in assets and 6,600 offices.
Analysts' take: They view it as an efficient organization that has been able to boost profits by cross-selling to its existing customer base. It gets eight "buy" ratings and two "holds" from analysts. S&P has a $33 price target on its shares, about a 10 percent premium to the current price.
Company profile: Qualcomm develops and licenses wireless technology and manufactures semiconductors for mobile phones. It owns many wireless communications industry patents that it licenses to most major handset makers. It has a market value of $97 billion.
Analysts' take: It has a relatively impregnable niche in the wireless industry, and also has a big presence in the competitive semiconductor market, where the firm is a key supplier of chips to wireless handset makers. It also generates royalty revenue by licensing its intellectual property. S&P has a $73 price target on its shares, a 26 percent premium to the current price. It gets 22 "buy" ratings, 16 "buy/holds," eight "holds," and one "sell" from analysts.
Company profile: Hewlett-Packard makes hardware and software, and offers services to businesses, governments, and individuals, worldwide. It has a market value of $56 billion.
Analysts' take: It has a recent tumultuous past but is an industry leader with wherewithal to buy its way into new business opportunities. Analysts ratings are all over the place with 10 giving it a "buy" rating, three "buy/hold," 17 "hold," three "weak/hold," and two, "sell."
Cathers said that it gets an A-quality rating and an S&P Fair Value rating of 5, the firm's highest, and that its quantitative metric indicates that it's undervalued.
3. Wells Fargo Advantage Opportunity Fund
Summary: The fund lost 6.9 percent last year, versus its peers' 2.75 percent decline, but it's got a 19.8 percent annualized gain over the past three years, which outdoes its peers by three percentage points.
"The fund's overall risk considerations mark is positive," said Cathers, but he rates its cost factors at "neutral" due to a potentially hefty front end sales load, and expense ratio higher than its peers. It's up 5.5 percent this year ranking it in the 58th percentile among its peers. Among its top holdings are:
Company profile: Praxair makes and sells industrial gases worldwide.
Analysts' take: They like that industrial gases are an integral part of many companies business and that Praxair locks in customers to 15- to 20-year contracts, thus helping it control its costs and predict revenue. S&P has a $115 price target on it, which is a 4.5 percent premium to its current price. It's a small-cap company at $33 billion market value.
Company profile: Target is one of the largest retailers in North America, with about 1,800 stores.
Analysts take: It is in a competitive industry but is expected to see some growth from a recent move into Canada and as its big move to offer food and groceries gains traction. It is also selling off its credit card business, which will lower risk. S&P has a $53 price target on it, which is a 5.5 percent premium to the current price.
Company profile: Omnicom is a holding company for advertising, marketing and communications firms that operates in more than 100 countries. It is small-cap at a $13 billion market value.
Analysts' take: The company has a record of delivering solid results over an extended period through a variety of economic environments and it has weathered the current tough one in fine shape. Since there are few fixed costs, profit margins hold up well.
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