An ETF provides a single investment vehicle that typically invests in a broad universe of stocks mirroring an index or a thematic style. Investors most often look to ETFs as a passive investment that allows easy access to the underlying securities. Beyond the initial benchmark decision and associated rebalancing rules, the investment manager usually puts little weight on the fundamentals of a given company held in the fund. Our strategy is to optimize the holdings of ETFs by ‘cherry picking’ the best and worst stocks within its holdings. The concept is to discover buy ideas, short ideas or pair trades that could allow you to stay ahead of your ETF.
CressCap employs a portfolio tool that generates a report card on all of the stocks within an ETF or any portfolio. As an example, we believe we’ve identified two stocks from the First Trust NASDAQ Cybersecurity ETF ‘CIBR’ that should create positive relative returns, and one stock from our portfolio tool selected as a short, which could generate negative returns. Our five factor model rates the underlying financial metrics every day on 6,500 stocks globally. We believe this model can help investors stay ahead of ETFs by optimizing their portfolios.
First Trust Cybersecurity ETF (CIBR) is an ETF that holds 36 stocks of cybersecurity services companies. Our portfolio tool rapidly evaluates stocks in the ETF and provides academic style grades from A to F for the five key factors of value, growth, EPS revisions, profitability and momentum. We use it to rank and track key fundamental attributes quickly across seven global regions. This strategy has allowed us to pinpoint possible buys and sells within the CIBR which are detailed below:
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Palo Alto Networks (PANW-US)
Overall Grade: A+
Palo Alto Networks (PANW) is a fast-growing intelligent firewall provider. The company’s firewalls allow control at a very granular level for users, apps and content identification. It’s cloud-based security solutions allow customers to control data and defend against sophisticated cyber attacks.CressCap likes PANW for its improved growth and EPS revisions over the last two quarters. While the stock has gotten pricey based on its P/E, P/S and EV/FCF multiples, growth has risen from a B last quarter to a B+. This reflects the company’s two year historical sales growth rate of 89.82% vs. the sector average of 23.53% Perhaps more importantly, PANW’s EPS revisions by the analysts who cover the stock has risen from a C, to a B+, to an A+ over the last two quarters. We think that PANW will continue its strong fundamental and stock performance, despite the extremely challenging cyber attack threat environment and government initiatives to force companies to protect their digital assets from cyber attacks.