WHAT WE'RE LOOKING FOR
Exchange-traded funds are a convenient, popular and effective way to invest, but one thing you have to be aware of is that you're buying into stock indexes made up of both good and bad stocks. This week, we're prying open some notable ETFs to see what's inside. Our analysis tool is a measure of a company's ability to generate wealth for shareholders called EVA, or economic value added. Here, we look at the wealth-creation power of the stocks in the iShares CDN Energy Sector Index Fund (XEG-T).
Montreal-based Stockpointer, a specialist in EVA analysis, has alphabetically listed the stocks and income trusts that account for the vast majority of the assets in XEG, along with three key EVA measures:
- Intrinsic value: What a stock should be trading at according to the economic value it creates for shareholders.
- Price over intrinsic value: Puts a stock's actual trading price in perspective. Higher numbers suggest an over-valued stock, while a score under 1.0 suggests bargain pricing.
- Economic performance index score: The EPI offers a way of comparing EVA for companies across different sectors. A company needs an index score of at least 1.0 to be considered a wealth creator.
WHAT WE FOUND
The energy sector was one of the best performers in the Canadian market over the past 12 months, and you would have ridden the wave if you owned XEG. So, what's up with the low EVA rankings for this ETF and most of its constituents? Stockpointer said it's a result of declining profitability in the energy sector over the past 12 months. Care to focus on the solid wealth creators in the index? One name to investigate is Precision Drilling Trust, which is trading well below its intrinsic value as calculated by Stockpointer.